People have adopted the wait and see strategy following heavy losses sustained in July in a similar situation, said President Forex Association of Pakistan Malik Bostan. PHOTO: FILE
KARACHI: Rupee showed signs of its inherent weakness on Friday, as it abruptly lost 4.7% to hit a record low of Rs110.50 to the US dollar in intra-day trading, before ending at a more respectable, but still weaker, Rs107 in the inter-bank market.
The Pakistani rupee has been under immense pressure in recent times with a widening current account deficit along with falling exports making the case stronger for depreciation in the currency.
On Friday, expectations were met as the rupee shed value in intra-day trade. However, the abrupt movement was caused after the “central bank dramatically shifted burden of a big oil import payment to commercial banks,” a senior banker told The Express Tribune.
Rupee suffers 4% fall in intra-day movement
The rupee closed the day at Rs107, an eventual movement of 1.42% or Rs1.5, after closing Thursday at Rs105.5. However, there was a difference in explanation as to why the rupee gained in value in the latter half of the day.
“The State Bank of Pakistan made selective intervention (pumping dollars into the market) to see the rupee closing at its desired level,” the seasoned banker added.
He elaborated the central bank provides dollar-denominated soft loans to importers and exporters via commercial banks on a regular basis from ‘FE 25 deposits’ which it then recovers in one to two weeks.
“But when the oil importers were scheduled to make a big payment this (Friday) morning, the SBP abruptly stopped responding to commercial banks which were in need of dollars to make the import payment … the commercial banks gave so many calls to the central bank for the dollars, but it maintained complete silence this morning (wee hours) against its usual practice of promptly responding to the banks throughout the working hours on working days.
“The situation meant that needy commercial banks bought dollars from the inter-bank market, which resulted in abruptly jolting the rupee-dollar parity,” the banker added.
The SBP returned to the inter-bank market to ease the situation as it resumed giving some soft loans to the importers, the banker added.
“The volume of the oil import payment was around $40-50 million. Pakistan makes such huge import payments 6-8 times every month,” he estimated.
The banker anticipated the rupee would depreciate to Rs115 a dollar by June 2018. Besides, the International Monetary Fund and several independent economists have said the rupee is overvalued and called on authorities to let the currency depreciate.
What the central bank says
On the other hand, the SBP came up with a simple explanation to the fiasco that ended with the rupee shedding 1.42% of its value against the greenback.
“The continuation of high growth in imports led to a widening of (the) current account deficit, and consequently, depletion in the country’s foreign exchange reserves,” said the SBP in a release issued later in the day.
“These pressures have persisted leading to the adjustment in inter-bank exchange rate. This movement in the exchange rate is based on demand and supply of foreign exchange in the interbank market.
“The SBP is of the view that this market-driven adjustment in the exchange rate will contain the imbalance in the external account and sustain higher growth trajectory. The exchange rate will continue to reflect the demand and supply conditions; and SBP stands ready to intervene, in case speculative and/or momentary pressures emerge, for smooth functioning of the foreign exchange markets,” it said.
Open market reaction
The open market strictly followed movement in the inter-bank throughout the day. An Islamabad-based dealer said the dollar closed at Rs108-108.50 on Friday.
Foreign exchange: SBP's reserves decrease 6.55%, stand at $12.7b
President Forex Association of Pakistan Malik Bostan said there was no panic in the open market. “People have adopted the wait and see strategy following heavy losses sustained in July in a similar situation,” he said.
Earlier in July 2017, the rupee lost 3.19% to Rs108.25 per US dollar for one day only in the inter-bank, but intervention by the then Finance Minister Ishaq Dar helped it recover to Rs105.70 per US dollar the next day.
Published in The Express Tribune, December 9th, 2017.
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