Rupee weakened to 84.15 per US dollar yesterday, in the aftermath of central banks decision to stop providing dollars for the remaining oil payments, which has left many fearing further slide ahead.
The move will indeed increase currency market volatility in the short run with the rupee continuing its slow downward momentum in the medium to long run. But if the currency slips to 85 versus greenback in the coming week or so, it would be an opportunity for exporters to benefit by booking their orders in advance or locking in forward contracts before rupee comes back to hover around 83 - 84 levels.
With trade and current account balances faring relatively well compared to last year, there is an ample dollar liquidity to meet the additional burden of oil payments, which is expected to be around $300-350 million per month on an average. This is evident from forward 3-month swap of $1.9 billion of banks with the State Bank to absorb the shock of these additional crude oil payments.
Mind you, when the import payments of POL products were routed to banks through the inter-bank market in mid July, the 3-months forward swaps were around $1.6-1.7 billion. And the rupee-dollar parity jumped to 83.35 by the start of August before it reverted back to around 82.50 by mid August. However, the rupee still continued on with its gradual depreciation since the start of this calendar year.
Now the risk to rather stable rupee is the spike in international oil prices that would have a direct impact on inert-bank currency market. Pakistans crude oil import averaged $68/barrel in the first five months against the budgeted average of $73/barrel for the whole year. Unless the price of global crude oil soars so high to average around $80/barrel or above in the next seven months, the rupee will not be under immense pressure.
Then there is also a possibility that the Middle East will start pumping more oil to boost liquidity in the region and help their debt trapped neighbor Dubai. Thus, the demand-supply mechanism might not allow oil to jump at levels higher than $80 in the near to medium term. Mind you, our oil import bills are computed at Arab light which has been at 1.3 percent discount to WTI price in the last five months anyways.
On the other hand, the problem lies on the domestic liquidity front that is hampering the nascent economic recovery. In the latest 7-day reverse open market operation, the central bank injected Rs148 billion in the banking system, whereas, it was net zero at the end of last fiscal year. And the agony intensified with virtually all the liquidity created either going out of the system for Eid related transactions or to finance government expenditures.
This liquidity crunch has arrested deposits creation to accelerate through adequate fresh lending and lack of business activities. To add fuel to domestic liquidity there is an immediate need of some foreign flows for fiscal support to curb the crowding out phenomenon.