Genuine demand or speculative buying?
interest rates and tighter liquidity will help curb buying
By AMANULLAH BASHAR
Oct 09 - 15, 2000
The panic booking by the importers, holdback attitude
of the exporters speculating a better return, mopping-up by the
government for debt servicing and speculative buying are the major
factors creating an unusual demand for the dollar both in the inter-bank
as well as in the kerb market.
The rupee, as a consequence, came under immediate
pressure, with recent debt payments leading to a sharp decline in its
value against the dollar. The rupee fell as low as Rs59.80 on October 4,
which was a 12.5 per cent appreciation of the dollar. The central bank
has been supporting the rupee through direct intervention selling a
reported $60-70 million in the inter-bank foreign exchange market.
Syed Sajjad Haider of Finex Securities while spelling
out the factors mounting pressures on rupee-dollar parity felt that the
price of Rs52.10-Rs52.30 fixed for official trading was not the genuine
one. On July 20 when the central bank placed the rupee on a free float
withdrawing the unofficial trading band, the entire backlog held up for
such a long time found a way in the form of battering the rupee against
The recent financial measures taken by the SBP and
more in the offing may help rupee to regain stability in the days to
come. Otherwise the rupee could slide down even to the extent of Rs70-75
if the market forces were not bridled.
On October 4, the SBP raised its discount rate by 100
basis points to 3 per cent and also increased the cash reserve
requirement (CRR) for banks to 7 per cent from the earlier 5 per cent.
The move is seen as an attempt to drain liquidity from the banking
system to curb speculation in the inter-bank foreign exchange market due
to the recent pressure on the rupee on account of large debt payments.
The SBP also raised cutoff rates in the latest Treasury bill auction.
The 3-month t-bills cutoff was 10.50 per (up 199 basis points over
previous auction); 6-month t-bills cutoff was 11 per cent (up 200 basis
points) while 1-year t-bills were issued at a cutoff of 11.50 per cent
(up 222 basis points)
The gradual increase in interest rates was another
step to stabilize the rupee. Intervention however has so far failed to
stop the downward slide of the rupee. In addition, the last hike in
discount rate (19 September) and a sharp increase in cutoff rates also
did not have the desired effect. October 4 decision to further increase
the discount rate and cutoff yields together with the increase in CRR
signals the SBP's continued use of tighter monetary policy to support
the rapidly declining rupee. It is expected that higher interest rates
and tighter liquidity will curb speculative dollar purchases in the
inter-bank market. It is also hoped that the emerging scenario might
compel banks to offload their excess noster dollar holdings into the
The financial experts however feel that the latest
interest rate hike bears well for banks, however its negative
implications for both the economy and the equity market should also be
kept in mind. The low interest rate environment of the past two years
had only recently begun to bear fruit in terms of its impact on
investment and domestic demand. The corporate sector had started to
actively refinance its more expensive debts thereby reducing financial
costs and increasing appetite for further credit. Higher interest rates
also have a negative impact on stock valuations as these are linked to
investors' required rate of return or the discount rate used to value
the cash stream offered by financial instruments.
The decision taken by the commercial banks to self
impose 30 per cent cash margin on all imports and the measures for
financial restructuring taken by the central bank are expected to clip
the dollar wings. The SBP on its parts is reportedly considering capping
inter-bank foreign exchange rates once again to stabilize the rupee. The
Central bank may however be required a green signal from the IMF before
going for re-imposing a trading band. The market forces however feel
that need for putting a cap on exchange rate may not be arise in view of
the tight financial measures already taken by the State Bank of
It may be mentioned here that the removal of a cap on
exchange rate since July 20 resulted in a 13 per cent devaluation
against the dollar so far.
Meanwhile the foreign exchange dealers and State Bank
of Pakistan (SBP) have reached an understanding to bring dollar further
down to Rs58 in inter bank and Rs60 in the kerb market.
The government had allowed floating dollar to level
of only Rs58 as was agreed with International Monetary Fund (IMF),
however greenback crossed Rs60.
The Forex Association of Pakistan (FAP) has urged the SBP to cancel
the swap fund facility which was allegedly being misused by the
importers and requested to approve the demand. Swap had facilitated
speculations and now they are off the scene.