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Rupee-dollar parity remains stable. (Currency Market).

In the post 9/11 scenario, the rupee-dollar parity remained stable during March. In the inter-bank market, the value of dollar declined by few paisa. On the other hand, the kerb market witnessed minor increase in the value of dollar. As such, while the value of dollar in the inter-bank market was higher than the kerb market in the beginning, a feature unique in the POST-9/11 scenario, the reverse was true towards the end of the month. (See table below).

In the first week, the value of dollar (buying) declined by 27 paisa or 0.4 per cent in the inter-bank market. The rupee went up on inflow of foreign direct investment, but market analysts were of the view that the surge of the rupee was "engineered". The dollar fell below Rs.60 benchmark not because of real interaction of market forces but on the back of buying and selling with the State Bank.

In the second and third week, the rupee lost value in the inter-bank and kerb markets but gained in the last week, because of continued inflow of dollar.

The stability of rupee, according to State Bank, owes to large inflows by overseas Pakistanis exerting pressure on the dollar. This coupled with lower demand of dollar due to slack in imports helped the rupee gain strength towards the end of the month both in the inter-bank and kerb markets. Another factor responsible for stable rupee is the accumulation of foreign exchange reserves exceeding $5 billion, never witnessed in the past. The encouraging news from the IMF involving release of $107 million second tranche helped the rupee maintain its recent firmness.

The State Bank, in its desire not to allow dollar drifting below Rs.60, has been intervening in the market in a bid to provide respite to the exporters as the rising value of rupee is retarding exports. The State Bank is informally committed to maintain the value of dollar at Rs.60 and as such purchased dollar from the inter-bank market in the past five months to contain the fall after 9/11.

The remittances from overseas Pakistanis touched $1.3 billion in eight months or at $162 million on an average monthly. In March, the remittances were around $200 million and the year is likely to close with $2 billion compared to $1 billion last year. The current account showed a surplus of $1.27 billion in July-December 2001 against a deficit of $262 million in July-December 2000.

The State Bank is in the process of formulating operating rules for Foreign Exchange Companies that will start working from July 1, fulfilling an important condition of Poverty Reduction Growth Facility (PRGF) approved by IMF last year.

The State Bank is formulating rules for the proposed FE. Companies. Establishment of F.E. Companies will go a long way in improving the efficiency of foreign exchange market by not only addressing the problem of diversion of remittances to 'hundi' channel, but also increasing the effectiveness of the State Bank in monitoring of foreign exchange transactions.

The State Bank will open these companies after the foreign exchange market saw collapse of kerb premium which not only resulted in shifting of remittances flow from hundi to formal banking channels, it also arrested the trend of dollarisation.

The shift occurred the 9/11 events as and the western cc introduced stricter against the informal remittances. Even UAE went for documentation checked the capita The whole objective stop money laundering as to rein in flow of I terrorist organisations throughout the world an episode sponsored by the US.

The fall in kerb premium not only constrained the flows through 'hundi' system, it also led to a complete reversal of devaluation expectation in the market. Before the September 11 events, the difference between the kerb and official market hovered around Rs.3 to 4 a dollar. But after the increased inflow of remittances from the overseas Pakistanis and selling of dollars from the local people, the difference narrowed by a larger magnitude and since last couple of months it is around 20 to 30 paisa or sometime the rate at the inter-bank is higher than the kerb markets (as on March 4). During March, the difference between the two rates has been 14 and 19 paisa in buying and 10 and 17 paisa in selling.

Any skirmish, let alone war, with India is likely to put pressure on rupee as there is likely to be rush for dollar in the kerb market in the event of stock market slide resulting from crash in confidence. In this case, even PRGF programme may be derailed which would be disastrous for the economy as the IMF has been sending signal not to increase defence spending without disturbing the social sector programme. Much will depend on the confidence of the people which has to be maintained at any cost.
Currency Rate

(Rs. per US$)

 Inter-Bank Rate Kerb Rate
Date Buying Selling Buying Selling

04.03.2002 60.19 60.20 60.00 61.10
11.03.2002 59.92 59.95 60.36 60.45
18.03.2002 60.14 60.16 60.40 60.50
26.03.2002 60.13 60.15 60.40 60.50
29.03.2002 60.08 60.10 60.22 60.27

Source: Business Recorder
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Publication:Economic Review
Date:Apr 1, 2002
Words:885
Previous Article:Price situation (April 2002).
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