A vigilant central bank of the country in an unusual action decided to discipline the banks, which it felt were adding downward pressure on an already depreciating Pak rupee. After watching for four-five weeks and giving verbal warnings, in some cases, on 10th January, 2012, the SBP took action against some commercial banks by reducing their Net Open Positions (NOP) while once again warning others not to take unnecessary position against the national currency. The State Bank's action cannot be termed erratic as the treasurers of all the major banks were kept in loop of possible action, in case the banks, were found involved in speculating against the rupee and creating heavy demand for US dollars without the backing of trade deals. It is the job of the bank treasury to hold a view on various currency values and take long or short positions. But they cannot be allowed to speculate against the local currency on the strength of their depositor's fund. The Nostro limits of banks were reduced in a well-thought out action to show the resolve of the SBP in pursuing the matter in earnest. It may be mentioned that banks are allowed to hold a particular level of dollars in their Nostro accounts abroad thereby allowing them to settle trade transactions from their own resources. Individual bank limits are worked out by the SBP under a formula which imposes a maximum cap of Rs 2.5 billion or 20 percent of the paid up capital net of losses - whichever is lower - as per the last audited accounts of a bank. The total exposure limit allowed by the SBP to all the banks is estimated at Rs 35 billion. It is obvious that a reduction in Nostro limits or NOP, banks would correspondingly lower the aggregate of dollars held abroad, ie around 380 million. Any reduction in this amount would help forex reserves with dollars held by the SBP and avoid pressure on balance of payment (BoP). The State Bank could look the other way when the foreign sector of the country was performing satisfactorily, the level of the foreign exchange reserves was steady and the Pak rupee rate was stable at around Rs 86 to a dollar in the exchange market. The reason for such soft behaviour was that the traders behaved normally and there was no undue rush for opening LCs in advance in anticipation of a much stronger dollar in the coming months. As the margin between the spot and future rates in the foreign exchange market is increasing, importers want to hedge their bets and the pressure on the rupee is gathering momentum with all the attendant risks to the economy. The State Bank does not want to be seen as a bystander in this kind of situation. Its action against rupee speculation was rewarded by a gain of 70 paisas in the rupee rate against the US dollar in the interbank market on 10th January as the pressure for the purchasing of dollars subsided to a certain extent. The rate in the open market also followed the same pattern. However, the moot question is whether such measures of the State Bank would have a lasting impact or only serve to arrest the deteriorating trend in the rupee rate for a short while. It is not difficult to understand that the present action of the State Bank is a mere signal to the banks to behave properly and strictly in accordance with the law, failing which they could be taken to task for violating the prescribed procedures. In no way, could it improve the aggregate supply or restrict the growing demand of the greenback to an extent to have a substantial positive influence on the rupee rate for a longer period. Therefore, in order to ensure stability in the foreign exchange market, the country needs to address certain fundamental issues which are driving down the rupee rate. The trade and current account deficits which have deteriorated markedly during the first half of FY12 have to be narrowed within manageable limits to maintain foreign exchange reserves at a comfortable level. Acute energy shortages have to be overcome, political uncertainty has to be removed and the law and order situation has to be vastly improved to encourage investment, revive growth and enhance exportable surpluses in the country. At the same time, widening fiscal deficits have to be brought down to sustainable limits to restore macroeconomic stability and soften price pressures. Also, there will be no flight of capital or dollarisation of the economy to debase the domestic currency if economic indicators are sound and there is normalcy in the country. We are afraid that without attending to the basic factors of fast depreciation of the rupee, the State Bank's exercises of cutting corners could only provide a temporary respite to the battering of Pak currency. Copyright Business Recorder, 2012
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