KARACHI, June 28: The State Bank on Monday mopped up Rs40 billion from a fairly liquid inter-bank market for four weeks at an open market operation held for this purpose. This draining of excess liquidity is expected to support the rupee that has been on the fall since the beginning of this month.
The central bank contracted Rs40 billion, treasury bills repo with banks at 3.05 per cent against the demand of Rs54.1 billion. Senior bankers said the SBP, however, rejected bids worth Rs1 billion for two-week repo. The OMO failed to generate any bid for one-week repo.
Four-week repo of Rs40 billion T-bills at 3.05 per cent means that the SBP will resell these bills to the banks after four weeks, and pay them 3.05 per cent annualized return for this period.
The bankers say the outflow of Rs40 billion from the banking system will not only contain the fall of the rupee, but will also help in checking unusually high growth of monetary assets and dampening inflationary expectations.
The rupee on Monday shed six paisa more against the dollar to close at 58.16 in the inter-bank market. The local currency has lost 47 paisa or 0.8 per cent of its value against the dollar so far during this month, coming down from 57.69 a dollar at end-May to 58.16 a dollar on June 28.
The rupee has been on the fall on year-end outward payments by the government and the private sector. Another reason for the fall is the rising trade deficit. Figure for trade deficit in June will be out in the second month of July, but sources at the Federal Bureau of Statistics say it will be around $500 million.
In April and May also, the trade deficit averaged over $500 million per month, more than double the average monthly deficit of less than $200 million between July and March 2003-04.
At 58.16 per US dollar, the rupee shows a decline of 35 paisa or 0.6 per cent in its value so far during this fiscal year. At the end of the last fiscal year it stood at 57.81.
Whereas this annual depreciation of the rupee is not so significant, a big decline of 0.8 per cent in its value so far during this month has perturbed the central bankers, who are making moves to keep it strong. Draining out excess liquidity from the banking system is one such move.
Excess liquidity in the system not only makes the local currency cheaper, it also fuels inflation. That is why the draining of Rs40 billion from the system is likely to dampen inflationary expectations.
The consumer inflation measured by Consumer Price Index shot up 7.13 per cent in May 2004 over May 2003. Average consumer inflation in eleven months to May 2004 rose by 4.22 per cent over the same period of the last fiscal year, against the full fiscal year's target of 3.9 per cent.
The central bank is determined to make monetary moves to contain inflation primarily because an unusual growth in money supply so far during this fiscal year has also been responsible for pushing it up. Monetary assets or M2 grew by 17.12 per cent between July 1 2003 and June 12, 2004 against the target of 11.06 per cent.