On the face of it, the currency market is moving smoothly. There is no stress in the market. The currency is appreciating, albeit at a slow pace. However, the liquidity is being managed subtly, as there is an inherent tightness and that is not going away anytime soon. That makes the recovery fragile. And seeing the continuous vulnerability in the external sector with the recent inflation recording of 29 percent, a wise decision would be to keep the policy rate at 22 percent in the upcoming monetary policy, and not expect too much easing (as being hoped by some) in the next 12 months.

The currency market flows are being managed. There is nothing new in it. The practice has been there since the start of 2023. Banks are implicitly asked to manage the flows within. There was a flurry of flows from 6th September to 16th October when the crackdown on smuggling and illegal foreign exchange companies resulted in exporters selling in forward and open market players clearing inventory. SBP had pounced upon the opportunity to lower the forward liabilities and allowed banks to pay pending dividends.

Now the party is over. Virtually, no further dividend and other repatriation payments are allowed. Banks are only allowed to execute contract-based trade payments and M-Form remittances if they have a surplus after executing their LC-based outflows. There is no said rule; but that is the ground reality, which is confirmed by banking treasury channel checks.

Every day the opening bid-offer is quoted by a bank or two. In most cases, the offer is more of an illusion than an executable price. If a bank lifts the offer, the seller reports the sale to the SBP, and the buyer receives a call from the regulator. It’s not a nice call. The message is simple: use your own export and inward remittance flows to execute your payment and outward remittance flows; do not try to access the market for liquidity - use your own. Any direct buying action from the market will require express permission from the SBP or it’s a no-no.

Above is the view of two banks. However, a treasurer from a third bank thinks that the market is just doing fine. As per him, banks are allowed to make all the important payments. His main point is that there is no stress in the market. With the rate slowly coming down, importers are in no hurry, while the exporters are coming at a normal pace.

Remittance flows did not grow as such in November from October. In one bank, the flows are down by 4-5 percent while in another bank, the growth remained flat. Overall, it is expected that remittances in November may marginally be lower from October. Export flows are normal, and almost all the forwards being sold are maturing with actual inflows. The demand for forward is low, which implies exporters are not expecting the currency to appreciate significantly.

There are mixed views about how the market is being managed. But all the players, agree that the currency is likely to hover around the current levels till December end, and there is seemingly no pressure in the next few weeks. All of them are of the view that SBP should be cautious in its monetary policy stance and should not hurry in easing.