The rupee is getting stronger and stronger, albeit the real effective exchange rate (REER) till January, as per SBP data, was at a six percent discount to its equilibrium value. This implies that rupee is at six percent premium against its trading partners'' weighted average currencies in the interbank market.
REER data for the last two months is yet not published, but with no major change in inflation of the top two trading partners, there is no fundamental long term reason for rupee to gain strength against other currencies.
What is behind this rally? The gap between interbank and open market which widened to around 200 paisa is now rationalised at 15-20 paisa, thanks to control on smuggling and the sorting out of issues amongst exchange companies, State Bank and the interior ministry. That helped regain sanity in the open market.
Even in the interbank market, rupee appreciated by 1.5 percent against dollar last month. Apart from the slash in smuggling demand and panic selling, SBP sources cited lower oil payments and some telecom related foreign inflows as the chief reasons for northward movement in currency market.
The expected delay in IMF''s fifth tranche by at least three weeks is going to hamper the regained confidence in currency market. Mind you, the money market was not excited at IMF money at the first instance. The conflict of federating units, especially Sindh, with the federation on proposed VAT bills is detrimental for smooth IMF related flows.
Moreover, strategic dialogues with the US concluded with virtually nothing new in the long wish list presented by the delegation has been granted, apart from military hardware aid. The assurance on release of pending CSF and on Kerry-Lugar Bill was already in the pipeline and might not have required such a dialogue.
Albeit, the release of these funds including $125 million on thermal plants rehabilitation might not excite the market participants, given the track record. Mindy you, the US had only released $349 million in the last nine months in cash.
Thus, based on REER premium, delay in IMF flows and more hype over reality of US-Pak Strategic dialogues might apply brakes on rupee upward flight. The rupee is expected to hover around the 83-85 level against greenback for coming few weeks.
Electricity tariffs, barring lifeline consumers, are 60 percent higher than the levels in 2008. Six percent further hike in electricity prices and similar revision in petroleum products this week, might fuel the prices of other commodities in coming months. However, food prices might not repeat the last year''s fiasco owing to better sugarcane and wheat crops.
The money managers took note of these developments while considering the need of fiscal financing through domestic sources keeping a close eye on resurgence in inflation maintained the status quo.
Money aggregates:
The government borrowing and credit to private sector are going hand in hand for the last five months, albeit with higher volatility in the former. Had the net foreign assets not been in red for most of the time, private credit could have been much more than the government borrowing.
With a delay in IMF tranche including around $370 million bridge financing for fiscal support, this trend is likely to continue for the at least six more weeks. Unless, the fund money is released by April end or pending security related flows by US materialise, as assured in recent strategic dialogues, corporate sector might well be deprived of banks'' attention for another six to eight weeks ie by fiscal year end.
With tight liquidity in money markets, rates are likely to remain high, while low seasonal credit requirement amid low foreign liquidity kept the banking advances dry in the third quarter. Both the deposits and advances after registering a hefty growth in high season (October-December) declined by 0.5 percent and 1.9 percent respectively, during the last 11 weeks.
For the week ending March 13, the high powered money creation of Rs67 billion in the previous week helped the demand and time liabilities surge by Rs26 billion. With Rs 2 billion decline in currency in circulation, the money supply increased by Rs23 billion over the last week.
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KEY MONETARY AGGREGATES
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Rs (mn)                                 AS OF
                                   13-Mar     6-Mar    Change
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Currency in Circulation           188,803   191,085   (2,282)
Total Demand & Time Deposits      147,713   121,931    25,782
Broad Money (M2)                  345,092   321,614    23,478
NFA                                70,281    60,774     9,507
NDA                               274,812   260,840    13,972
Net Government Borrowing          249,397   240,123     9,274
Borrowing for budgetary support   312,100   297,943    14,157
from SBP                          141,738   127,835    13,903
from scheduled banks              170,362   170,108       254
Commodity operation               (61,724)  (56,498)  (5,226)
Credit to non-govt sector         223,515   223,067       448
to private sector                 146,650   146,499       151
to PSEs                            76,945    76,837       108
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Source: SBP
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