Local Foreign Exchange Local Foreign Exchange MarketMarket

Local Foreign Exchange Local Foreign Exchange MarketMarket

By By Muhammad ARIFMuhammad ARIF

Senior Joint DirectorSenior Joint Director FSCDFSCD

By By Muhammad ARIFMuhammad ARIF

Senior Joint DirectorSenior Joint Director FSCDFSCD

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A CommentA Comment

““There is no sphere of human There is no sphere of human influence in which it is easier to influence in which it is easier to

show superficial cleverness and the show superficial cleverness and the appearance of superior wisdom as in appearance of superior wisdom as in matters of currency and exchange”matters of currency and exchange”

Winston ChurchillWinston ChurchillHouse of Commons 1946House of Commons 1946

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Structure of the Structure of the PresentationPresentation

Basic Concepts, Terminologies, Basic Concepts, Terminologies, Instruments & Mechanism.Instruments & Mechanism.

Exchange Rate RegimesExchange Rate Regimes Historical perspectiveHistorical perspective Foreign Exchange Trading & rate Foreign Exchange Trading & rate

quotationsquotations Role of SBP in the FX Market. Role of SBP in the FX Market.

As per Foreign Exchange Act, (Section As per Foreign Exchange Act, (Section 2), 1947.2), 1947.(c)(c)"Foreign Currency""Foreign Currency" means any currency means any currency other than Pakistan currency;other than Pakistan currency;

(d)(d) "Foreign Exchange""Foreign Exchange" means includes any means includes any instrument drawn, accepted, made or issued instrument drawn, accepted, made or issued under clause (8) of section 17 of the State Bank under clause (8) of section 17 of the State Bank of Pakistan Act, 1956, all deposits, credits and of Pakistan Act, 1956, all deposits, credits and balance payable in any foreign currency, and balance payable in any foreign currency, and any drafts, traveler’s cheques, letters of credit any drafts, traveler’s cheques, letters of credit and bills of exchange, expressed or drawn in and bills of exchange, expressed or drawn in Pakistan currency but payable in any foreign Pakistan currency but payable in any foreign currency;currency;

BASIC CONCEPTS/TERMINOLOGIESBASIC CONCEPTS/TERMINOLOGIESForeign Currency v/s Foreign ExchangeForeign Currency v/s Foreign Exchange

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Financial MarketsFinancial Markets

Financial market is a place where Financial market is a place where Resources/funds are transferred Resources/funds are transferred from those having surplus/excess from those having surplus/excess to those having a to those having a deficit/shortage.deficit/shortage.

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Foreign Exchange Foreign Exchange MarketsMarkets

The market where the commodity The market where the commodity traded is Currencies.traded is Currencies.

Price of each currency is determined Price of each currency is determined in term of other currencies.in term of other currencies.

Exchange Rate is the price of one Exchange Rate is the price of one country's currency expressed in another country's currency expressed in another country's currency. In other words, the country's currency. In other words, the rate at which one currency can be rate at which one currency can be exchanged for another. exchanged for another. e.g. Rs. 59.50 per one USDe.g. Rs. 59.50 per one USD

Major currencies of the WorldMajor currencies of the World

USDUSDEUROEUROYENYENPOUND STERLINGPOUND STERLING

What is an Exchange Rate ?

What is a Foreign Exchange What is a Foreign Exchange Transaction ?Transaction ?

Any financial transaction that involves more Any financial transaction that involves more than one currency is a foreign exchange than one currency is a foreign exchange transaction.transaction.

Most important characteristic of a foreign Most important characteristic of a foreign exchange transaction is that it involves exchange transaction is that it involves Foreign Exchange Risk.Foreign Exchange Risk.

PARTICIPANTS IN THE PARTICIPANTS IN THE FOREIGN EXCHANGE FOREIGN EXCHANGE

MARKETMARKET All Commercial Banks All Commercial Banks

(Authorized Dealers only).(Authorized Dealers only). State Bank of Pakistan.State Bank of Pakistan. Corporate Treasuries.Corporate Treasuries. Public Sector/Government.Public Sector/Government. Inter Bank Brokerage Houses.Inter Bank Brokerage Houses. Resident PakistanisResident Pakistanis Non ResidentsNon Residents Exchange CompaniesExchange Companies Money ChangersMoney Changers

FIXEDFIXED PEGGEDPEGGED COMPOSITECOMPOSITE MANAGED FLOATMANAGED FLOAT FREE FLOATINGFREE FLOATING

FOREIGN EXCHANGE REGIMESFOREIGN EXCHANGE REGIMES

Components of a Standard Components of a Standard

FX TransactionFX Transaction Base CurrencyBase Currency (USD/PKR)(USD/PKR) ‘‘Dealt’ or ‘Variable’ CurrencyDealt’ or ‘Variable’ Currency Exchange RateExchange Rate AmountAmount Deal Date Deal Date Value DateValue Date Settlement InstructionsSettlement Instructions

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ValueValue Date ConventionsDate ConventionsCurrencies are traded both inCurrencies are traded both in ReadyReady andand

forward forward value datesvalue dates..

1) Ready: 1) Ready: Settlement on the deal date. e.g. PakistanSettlement on the deal date. e.g. Pakistan

2) Value Tom : 2) Value Tom : Settlement on next day. e.g. CanadaSettlement on next day. e.g. Canada

3) Spot Transaction : 3) Spot Transaction : settlement usually in two settlement usually in two working days.working days.

In international FX transactions, Spot is the In international FX transactions, Spot is the Standard value date.Standard value date.

Why Spot Date ?Why Spot Date ?

Time Zone DifferenceTime Zone Difference Herstat RiskHerstat Risk

4) Forward Transaction: 4) Forward Transaction: Settlement at some future Settlement at some future date ahead of the spot.date ahead of the spot.

FX Rate Quotation:FX Rate Quotation:

In the forex market rates are always quoted ‘two way’.In the forex market rates are always quoted ‘two way’.Two way quote gives both ‘Bid’ and ‘Offer’.Two way quote gives both ‘Bid’ and ‘Offer’.

e.g.e.g.USD/PKR= 58.55 / 60 USD/PKR= 58.55 / 60

Bid / OfferBid / Offer

‘‘Big Figure’: Big Figure’: Term referring to the first digits of an exchange rate. These figures Term referring to the first digits of an exchange rate. These figures are rarely change in normal market fluctuations and are usually omitted in dealer are rarely change in normal market fluctuations and are usually omitted in dealer quotes. quotes.

‘‘Pips (or Point): Pips (or Point): The smallest incremental move an exchange rate can make. The smallest incremental move an exchange rate can make.

‘‘Base CurrencyBase Currency’ Vs. ‘’ Vs. ‘Dealt CurrencyDealt Currency’’

Number of variable or dealt currency unit in one unit of base Number of variable or dealt currency unit in one unit of base currency.currency.

In international quotes base currency comes first.In international quotes base currency comes first.e.g. e.g. BC/VCBC/VC USD/PKR= 58.55/60USD/PKR= 58.55/60

Price maker Vs. Price TakerPrice maker Vs. Price Taker

The bank quoting the price is The bank quoting the price is ‘price ‘price maker’maker’ or or ‘market maker’.‘market maker’.

The bank asking for the price or The bank asking for the price or ‘quote’ is the ‘quote’ is the ‘price taker’‘price taker’ or ‘user’. or ‘user’.

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RATERATE QUOTATION CONVENTIONSQUOTATION CONVENTIONS

IN-DIRECT QUOTATION:IN-DIRECT QUOTATION:

““Price of one Unit of Foreign Currency Price of one Unit of Foreign Currency in terms of Domestic Currency”in terms of Domestic Currency”

e.g. USD/PKR = 59.45/50e.g. USD/PKR = 59.45/50

Buy One USD at 59.45Buy One USD at 59.45Sell One USD at 59.50Sell One USD at 59.50Spread 00.05Spread 00.05

In the international market, almost all In the international market, almost all currencies are quoted indirectly.currencies are quoted indirectly.

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RATE QUOTATION CONVENTIONSRATE QUOTATION CONVENTIONS

DIRECT QUOTATION:DIRECT QUOTATION:

““Price of one Unit of Domestic Currency in terms of Price of one Unit of Domestic Currency in terms of Foreign Currency”Foreign Currency”

e.g. EURO=e.g. EURO= 1.2805/121.2805/12

Buy One Euro at 1.2805Buy One Euro at 1.2805Sell One Euro at 1.2812Sell One Euro at 1.2812SpreadSpread 0.00070.0007

Five Currencies are quoted in Direct TermsFive Currencies are quoted in Direct Terms

1) Pound Sterling1) Pound Sterling2) Euro2) Euro3) Australian Dollar3) Australian Dollar4) New Zealand Dollar4) New Zealand Dollar5) Irish Punt5) Irish Punt

In the international market, almost In the international market, almost all the currencies are quoted in terms all the currencies are quoted in terms

of USD.of USD.e.g.e.g.

JPY=JPY= 105.78/82105.78/82

A visit to REUTERS ‘EFX=’ Page.A visit to REUTERS ‘EFX=’ Page.

FORWARD TRANSACTIONSFORWARD TRANSACTIONS

1.1. Out right sale/purchase of a currency against Out right sale/purchase of a currency against the other for settlement at a future date at the the other for settlement at a future date at the predetermined exchange rate. predetermined exchange rate.

2.2. Forward rates are quoted as premium or Forward rates are quoted as premium or discount over spot rate.discount over spot rate.

3.3. Forward rates depend upon interest rate Forward rates depend upon interest rate differential between the two currencies.differential between the two currencies.

4.4. Currency with higher interest rates is at Currency with higher interest rates is at discount wrt currency having lower interest discount wrt currency having lower interest rate.rate.

5.5. Currency with lower interest rates is at Currency with lower interest rates is at premium wrt currency having higher interest premium wrt currency having higher interest rate.rate.

Calculating Forward RateCalculating Forward Rate

Interest rate of USD = 1.25%Interest rate of PKR = 6%Spot Rate = 58.50DB for PKR = Actual/365DB for USD = Actual/360

Six month Forward Rate =spot rate x (1+

.06*181/365)/(1+.0125*181/360)=59.87

FX SWAP TransactionFX SWAP Transaction

““An FX swap is a contract to buy an An FX swap is a contract to buy an amount of currency for one value date amount of currency for one value date at an agreed rate, and to simultaneously at an agreed rate, and to simultaneously resell the same amount of currency for resell the same amount of currency for a later value date, also at an agreed a later value date, also at an agreed rate, to the same counter party”.rate, to the same counter party”.

FX swap is essentially a ‘funding’ or FX swap is essentially a ‘funding’ or ‘Money Market’ transaction and does ‘Money Market’ transaction and does not involve exchange risk. not involve exchange risk.

Foreign exchange transactions are settled through Foreign exchange transactions are settled through NostroNostro and and VostroVostro accounts. accounts.

NostroNostro: our account with banks abroad. SBP : our account with banks abroad. SBP maintains various Nostro accounts in a number maintains various Nostro accounts in a number of countries.of countries.

VostroVostro: their account with us. Many multilateral : their account with us. Many multilateral agencies (e.g. IMF, World Bank) maintain their agencies (e.g. IMF, World Bank) maintain their Nostro accounts at SBP. Nostro accounts at SBP.

SWIFT (Society for Worldwide Interbank SWIFT (Society for Worldwide Interbank Financial Telecommunications)Financial Telecommunications)

Deals are done over Telephone, Deals are done over Telephone, REUTERS dealing system etcREUTERS dealing system etc

R E U T E R SR E U T E R S Dealing TerminalDealing Terminal Industry Standard for FX trading.Industry Standard for FX trading. Security guaranteed by Reuters Int.Security guaranteed by Reuters Int. Password Protected.Password Protected. Maintains record of all transactions.Maintains record of all transactions. SBPK (SBP’s REUTERS address)SBPK (SBP’s REUTERS address)

News TerminalNews Terminal Domestic Market Data/ news available on line. Domestic Market Data/ news available on line. Real Time Exchange Rate quotes of all major Real Time Exchange Rate quotes of all major

Currencies.Currencies. Data about Interest Rates (e.g. LIBOR)Data about Interest Rates (e.g. LIBOR) Various SBP pages on REUTERS.Various SBP pages on REUTERS.

Pre-Reform era till early 90s ( The Pre-Reform era till early 90s ( The fixed ERM & Exchange Control fixed ERM & Exchange Control

Regime)Regime) Fixed ERM, with occasional devaluations.Fixed ERM, with occasional devaluations. SBP to fix its buying & selling rates for Authorized Dealers SBP to fix its buying & selling rates for Authorized Dealers

and their rates for customers.and their rates for customers. Residents not allowed to hold foreign exchange.Residents not allowed to hold foreign exchange. Only ADs (Banks), allowed to deal in Fx.Only ADs (Banks), allowed to deal in Fx. Fx available only for current account transactions. (goods & Fx available only for current account transactions. (goods &

services) and some other personal transactions viz. travel, services) and some other personal transactions viz. travel, education, medical treatment etc.education, medical treatment etc.

Pre-Reform era till early 90s Pre-Reform era till early 90s (The fixed ERM & Exchange Control (The fixed ERM & Exchange Control

Regime)Regime) SBP to buy and sell forex from and to ADs, at its SBP to buy and sell forex from and to ADs, at its

buying and selling rates for Authorized Dealers.buying and selling rates for Authorized Dealers. SBP to provide forward cover to ADs for importers SBP to provide forward cover to ADs for importers

and exporters as well as foreign currency loans and exporters as well as foreign currency loans mobilized by corporates from abroad.mobilized by corporates from abroad.

Exporters of goods and services, were bound to sell Exporters of goods and services, were bound to sell forex to an AD at rates prescribed by SBP.forex to an AD at rates prescribed by SBP.

Elaborate system of reporting by ADs to SBP.Elaborate system of reporting by ADs to SBP.

Market liberalization. The decade Market liberalization. The decade of 90sof 90s

Early nineties marked an era of liberalization of foreign Early nineties marked an era of liberalization of foreign exchange market.exchange market.

FCAs Scheme was launched for Resident Pakistanis. FCAs Scheme was launched for Resident Pakistanis. Banks were required to surrender their FC deposits Banks were required to surrender their FC deposits against purchase of forward cover from SBP.against purchase of forward cover from SBP.

Money Changers were authorized to Deal in foreign Money Changers were authorized to Deal in foreign exchange (Notes and TCs only).exchange (Notes and TCs only).

Forward cover for imports and exports shifted to banks.Forward cover for imports and exports shifted to banks. Forward cover for FC loans also transferred to banks Forward cover for FC loans also transferred to banks

(under certain rules and regulations).(under certain rules and regulations).

Post detonation crisis (May ’98) Post detonation crisis (May ’98) and move towards market based and move towards market based

ERM.ERM. In early 98, Pakistan was making gradual moves In early 98, Pakistan was making gradual moves

towards market based ERM.towards market based ERM.Third currency rates to be quoted by banks.Third currency rates to be quoted by banks.SBP also stopped giving customer’s buying SBP also stopped giving customer’s buying

and selling rate and gave a 1% band to the and selling rate and gave a 1% band to the market, quoting its buying and selling rates for market, quoting its buying and selling rates for ADs.ADs.

The target was to put the currency onThe target was to put the currency on free float. free float.

Post detonation crisis (May ’98) Post detonation crisis (May ’98) and move towards market based and move towards market based

ERM.ERM. Detonation of May 98 changed the way things were Detonation of May 98 changed the way things were

moving.moving. Despite low reserves, SBP made the decision of going Despite low reserves, SBP made the decision of going

ahead with fx market reforms.ahead with fx market reforms. Phased approach was adopted for transition to free float.Phased approach was adopted for transition to free float. As a first step Two-Tier ERM was introduced in July 21, As a first step Two-Tier ERM was introduced in July 21,

1998.1998. Except for essential items (e.g. wheat l/cs) , the rest of Except for essential items (e.g. wheat l/cs) , the rest of

the trade transactions were settled through interbank the trade transactions were settled through interbank market. market.

Initially 50/50 , 80/20, FINALLY 95/05Initially 50/50 , 80/20, FINALLY 95/05

Post detonation crisis (May Post detonation crisis (May ’98) and move towards ’98) and move towards

market based ERM.market based ERM. Two-tier was finally abolished in May 1999.Two-tier was finally abolished in May 1999. Currency was freely floated.Currency was freely floated. Regulations pertaining to current account Regulations pertaining to current account

transactions remained more or less unchanged. transactions remained more or less unchanged. However all transactions were to be done at However all transactions were to be done at interbank rate and every bank was to offer its own interbank rate and every bank was to offer its own rate to customers.rate to customers.

However, an unofficial narrow band was imposed on However, an unofficial narrow band was imposed on banks, which remained there till July 2000. when it banks, which remained there till July 2000. when it was finally done away with.was finally done away with.

The Demand Side of inter-bank The Demand Side of inter-bank marketmarket

importers – buying foreign exchange to importers – buying foreign exchange to finance their imports.finance their imports.

A host of regulations governing A host of regulations governing imports into Pakistan.imports into Pakistan.

Out ward remittances for debt Out ward remittances for debt servicing.servicing.

Out ward remittances for services.Out ward remittances for services. PTEQ and BTQ, Medical treatment etc.PTEQ and BTQ, Medical treatment etc.

Forex TransactionsForex Transactions

Forex TransactionsForex Transactions

The Demand Side of inter-bank marketThe Demand Side of inter-bank market Remittances on account of education Remittances on account of education

abroad.abroad. Remittances on account medical Remittances on account medical

treatment.treatment. Repatriation of profit of foreign controlled Repatriation of profit of foreign controlled

companies and ‘freight collection’ etc.companies and ‘freight collection’ etc. Disinvestment through SCRA.Disinvestment through SCRA. A host of other invisible payments.A host of other invisible payments.

The Supply Side of inter-bank The Supply Side of inter-bank marketmarket

Exports – regulations governing export Exports – regulations governing export receipts.receipts.

Home remittances.Home remittances. Foreign Direct Investment.Foreign Direct Investment. Capital account receipts.Capital account receipts. Investment through SCRA.Investment through SCRA. A host of other invisible receipts.A host of other invisible receipts.

Forex TransactionsForex Transactions

Foreign Exchange RiskForeign Exchange Risk

Exposure to exchange rate movement. Exposure to exchange rate movement.

1.1. Any sale or purchase of foreign Any sale or purchase of foreign currency entails foreign exchange currency entails foreign exchange risk.risk.

2.2. Foreign exchange transaction Foreign exchange transaction affects the net asset or net liability affects the net asset or net liability position of the buyer/seller.position of the buyer/seller.

3.3. Carrying net assets or net liability Carrying net assets or net liability position in any currency gives rise to position in any currency gives rise to exchange risk.exchange risk.

NET OPEN POSITION- (NOP)NET OPEN POSITION- (NOP)A measure of foreign exchange riskA measure of foreign exchange risk

•NOP is the Net Asset/Net Liability position in all FCs together (Both B/S & Off B/S).

•Net Asset Position is also called “LONG” or “Overbought “ position.

•Net liability Position is also called “SHORT” or “Oversold “ position.

•NOP is a single statistic that provides a fairly good idea about exchange risk assumed by the bank.

•Its major flaw is that FX exposures in third currencies remain hidden.

EXAMPLE (NOP)EXAMPLE (NOP) (USD in Mio)

Opening Position $ 0.00

Ready Purchases from Exporter $ 1.00

Fwd Purchases from Corporate (1.00 Euro) \ $ 0.90

Ready Sell to importer ( 60 Mio Yen) - $ 0.50

Fwd Sell to Corporate - $ 0.40

NET OPEN POSITION $ 1.00

Foreign Exchange ExposureFX Exposure is the higher of the long and short positions in FCs.

EXAMPLE Currency-wise NOP in equivalent PKR

CURRENCY SHORT LONG

Dollar -10Yen 10Euro -10Pound 10

Total -20 20Net Open Position is 0 while exposure is 20.

Introduction to Inter-bank FX activitiesIntroduction to Inter-bank FX activities

Foreign Exchange Markets

Role of SBP and linkages Role of SBP and linkages with economywith economy

SBP’s Role in the Forex MarketSBP’s Role in the Forex Market

To manage the exchange rate To manage the exchange rate mechanism.mechanism.

Regulate inter-bank forex transactions Regulate inter-bank forex transactions and monitor the foreign exchange risk of and monitor the foreign exchange risk of the banks.the banks.

Keep the exchange rate stable.Keep the exchange rate stable. Manage and maintain country's foreign Manage and maintain country's foreign

exchange reserves.exchange reserves.

• SBP has imposed foreign exchange exposure limits on banks (FE 12 of 1999).

• The limits are tied with the Paid up capital of the bank.

• Previously banks had NOP limit, which was based on foreign exchange volume handled by the bank.

SBP’s Role in the Forex Market SBP’s Role in the Forex Market

TREASURYTREASURY OPERATIONS AT SBPOPERATIONS AT SBP

1.1. All Central Banks have treasuries to All Central Banks have treasuries to implement policy objectives vis a vis implement policy objectives vis a vis EXCHANGE RATE & INTEREST RATESEXCHANGE RATE & INTEREST RATES

2.2. Dealing room catered to the FX market Dealing room catered to the FX market onlyonly

3.3. Money market was being looked after by Money market was being looked after by the Securities departmentthe Securities department

4.4. It soon became apparent that the two It soon became apparent that the two cannot work in isolation with each other as cannot work in isolation with each other as the linkage between the money market & the linkage between the money market & exchange market became pronounced exchange market became pronounced

5.5. Finally the dealing room and securities Finally the dealing room and securities department were merged to form EDMD department were merged to form EDMD to from first ever Treasury of SBP.to from first ever Treasury of SBP.

Functions of DMMDFunctions of DMMD

Market MonitoringMarket Monitoring Pro active monitoring of interbank Pro active monitoring of interbank

MM & FX market by Front Office.MM & FX market by Front Office. Prepare demand/supply forecast.Prepare demand/supply forecast. Gather data from various Sources.Gather data from various Sources. Real time feedbck to management.Real time feedbck to management. Real time remedial measures to Real time remedial measures to

remove distortions in the market.remove distortions in the market.

A day in the Front OfficeA day in the Front Office NOP report.NOP report. FX inflow/outflow statements.FX inflow/outflow statements. Oil payments,Oil payments, Forward transactions.Forward transactions. Market monitoring – Market Flows and Market monitoring – Market Flows and

their impact on exchange rate.their impact on exchange rate. Money Market liquidityMoney Market liquidity Forward ratesForward rates Market activity – if requiredMarket activity – if required Rates Preparation – M 2 M, Wtd Avg, FCA Rates Preparation – M 2 M, Wtd Avg, FCA

Conversion.Conversion.

Front Office ChallengesFront Office Challenges Small Market SizeSmall Market Size Lumpy paymentsLumpy payments ‘‘Leads’ and ‘Lags’.Leads’ and ‘Lags’. Historical trend of keeping long Historical trend of keeping long

positions.positions. The issue of ‘entries in transit’.The issue of ‘entries in transit’.

INTERVENTIONINTERVENTION To keep exchange rate in line with To keep exchange rate in line with

macro objectives SBP has to macro objectives SBP has to intervene from time to timeintervene from time to time

Intervention is a process where FX Intervention is a process where FX is sold or purchased to keep the is sold or purchased to keep the right amount of liquidity available right amount of liquidity available in the FX market so that demand / in the FX market so that demand / supply equilibrium is maintainedsupply equilibrium is maintained

Intervention can be in READY or Intervention can be in READY or FORWARD FORWARD

OTHER FX RELATED OTHER FX RELATED FUNCTIONSFUNCTIONS

OFFSITE MONITORINGOFFSITE MONITORING DAILY RATES FOR MARKETDAILY RATES FOR MARKET THIRD CURRENCY ACTIVITY FOR THIRD CURRENCY ACTIVITY FOR

GoP PAYMENTSGoP PAYMENTS RESERVE MANAGEMENTRESERVE MANAGEMENT

Off Site monitoring of banks Off Site monitoring of banks by SBPby SBP

Inputs of Inputs of Computerized Computerized

Reporting SystemReporting System (CRS)(CRS)All individual foreign exchange transactions

reported by each bank on daily basis on a floppy diskette

Amount

Type of Deal

Counter Party

Currency

Rate

Posting date

Maturity Date

Deal Date

Mode of Deal

Off Site monitoring of banks Off Site monitoring of banks by SBPby SBP

Reports from Reports from CRSCRS

Exposure ReportFE - 25 balances & other depositsNostro BalancesUn-reconciled interbank deals

Off Site monitoring of banks Off Site monitoring of banks by SBPby SBP

Reports from CRS Reports from CRS Cont’d

Reports for research & statistical purposes

Business volume - banks/customers/currency

Types of transactions/customers/currency

Broker wise market volume reportHistory of exchange rates - trend analysis

How does SBP manages How does SBP manages exchange rate in the exchange rate in the interbank market?interbank market?

• Non-Quantitative Tools• Quantitative Tools

Non-Quantitative ToolsNon-Quantitative Tools

• Moral suasion• facilitating large commercial

outflows• Relaxation in FEEL

Quantitative Measures

Foreign Exchange Exposure Limit (FEEL) Basically restricts the banks to keep a net asset

(long) or net liability (short) position in foreign currencies.

Presently FEEL for each bank is set at 15 %15 % of it’s paid up capital.

In the presence of FEEL, banks’ net purchases or net sales in foreign exchange on a given day have to be within their FEEL.

How does SBP manages How does SBP manages exchange rate in the exchange rate in the interbank market?interbank market?

Physical interventionPhysical intervention

• Direct selling or buying of foreign exchange by State Bank in the interbank market.

• Such sale/purchase can be in spot or forward value

• It can have two objectivesTo provide support to the market

for lumpy paymentsTo manage the Rs/$ parity

• Intervention may be direct or indirect. Currently SBP only indirectly intervenes in the market.

• RESERVE BUILDING

Thank YouThank You Thank YouThank You