The State Bank of Pakistan on Thursday had to inject dollars in the interbank market to cater to an increased demand for the green back for the second day in a row.
However, with no support of any kind from the central bank to exchange companies there was a complete pandemonium or a situation in which there was a lot of noise, activity and confusion on the money changers' market where Pak rupee weakened to 67 against US dollar.
The downward spiral of 30 paisas on Wednesday in rupee-dollar parity maintained course as rupee weakened to Rs 64.70/64.75 upon opening on Thursday from Wednesday's close of 64.32/64.37 to a dollar. It was only upon intervention by SBP (with dollar injection) that the rupee strengthened later in the day to Rs 64.54/64.58 to a dollar.
The sudden fall on Wednesday was attributed to SBP purchasing dollars sold to banks earlier (under three months buy/sell swap) instead of rolling over the amount. This forced the banks to cover short positions resulting in a slide. Corporate importers seeing forward premiums shooting up from 85-90 paisas to Rs 1.50 panicked and started opening Letters of Credit of big amounts.
On the other side, seeing the rupee slide exporters decided to hold back their inflows, adding to the supply-demand pressure on the rupee. It was only after SBP sold some dollars later in the day, that the volatility in the interbank market was checked. However, the bid-offer band was seen widening to 20 paisas, from 5 paisas, with increase in the outflow/inflow gap on the interbank market.
OPEN MARKET: SBP licensed exchange companies came under speculative attack with the weakening of the rupee on the interbank market. As a result, multiple rates of exchange were prevailing on the market. The SBP policy rate for exchange companies was on display on display boards and only minor amounts of $500 or less were being transacted at the SBP rate with receipts.
The telegraphic transfer (T.T. rate) was 50 paisas higher. Whereas, big amounts were being transacted without any receipt at Rs 1.50 to a dollar more than the rate of exchange on the display board. And, the fourth rate was for people who are on a buying spree of UAE Dirham on the look out for a 'safe haven' in properties. The exchange companies pleaded with the SBP to supply them dollar at 50 paisas more than the interbank rate to check speculative buying and ease the inflows on the kerb market.
They say that SBP intervenes with 30 to 50 million dollars to check sudden jerks on the interbank market due to lumpy oil payments. It can do the same with much less amount, ie, $10-15 million sale to them.
Second, SBP needs to impose some curbs on the export of foreign cash currency, thereby increasing the local availability of cash with the country. And, there needs to be more coordination between the SBP treasury and exchange policy department which, the exchange companies allege, are speaking different languages.
According to market experts, Islamabad needs to curb the tendency to speak on monetary policy or exchange rates, which are the exclusive domain of the central bank. For example, the experts argue, Finance Minister Ishaq Dar's presentation to the press that government's target for forex reserves was $13 billion by end June this year has put pressure on the Pakistani currency.
Market players feel that the SBP has been ordered to build up forex reserves to $13 billion. They knew that at present the reserves are below this mark and banks are also aware of the $1.025 billion in swap deals conducted by SBP with them. Therefore after subtracting this amount from the reserves SBP would need $2 billion to reach the target fixed by the government.
It is just not possible for the SBP to simultaneously protect the reserves from falling and also shield a weakening rupee against pressures such as those of Thursday's. Unless there is help from multilateral agencies, 47 percent fall in FDI cannot be compensated with a billion dollar sale of exchangeable bonds of OGDC, therefore the pressure on the rupee would continue.