LINKAGES BETWEEN FOREIGN EXCHANGE AND MONEY MARKETS By Muhammad Arif Senior Joint Director FSCD

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LINKAGES BETWEEN FOREIGN EXCHANGE AND MONEY
MARKETSBy Muhammad ArifSenior Joint
DirectorFSCD
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PRESENTATION LAYOUT

• CENTRAL BANK OBJECTIVES
• CENTRAL BANK INTERVENTION
• STERILIZED INTERVENTION
• UNSTERILIZED INTERVENTION
• IMPACT THROUGH SBP BALANCE SHEET
• BRIEF VISIT TO NDA AND NFA
• IMPACT ON NET DOMESTIC ASSETS
• IMPACT ON NET FOREIGN ASSETS
• CASE STUDIES
• SBPS SWAP DESK

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CENTRAL BANK OBJECTIVES

• EXCHANGE RATE STABILITY
• RIGHT QUANTITY OF MONEY SUPPLY
• INTEREST RATE STABILITY
• INFLATION MANAGEMENT
• MACRO ECONOMIC BALANCE

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CENTRAL BANK INTERVENTION

• INTERVENTION IS SALE PURCHASE OF FOREIGN
  CURRENCY FOR A VARIETY OF REASONS LIKE
• ALTER MONEY SUPPLY
• IMPACT THE INTEREST RATE SITUATION
• STABILISE EXCHANGE RATE
• RESERVE BUILDING
• TO MEET NDA AND NFA TARGETS

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TYPES OF INTERVENTION

• STERILISED
• UNSTERILISED

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UNSTERILIZED INTERVENTION

• IF THE IMPACT ON MONEY SUPPLY IS NOT NEUTRALIZED
  THAN INTERVENTION IS CALLED UNSTERILIZED
• THE CHANGE IN MONEY SUPPLY WILL HAVE AN IMPACT ON
  INTEREST RATES, INFLATION LEVEL AND EXCHANGE RATE
• THIS TYPE OF INTERVENTION WILL EFFECT BOTH FX AND
  MM MARKETS

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STERILIZED INTERVENTION

• IMPACT ON MONEY SUPPLY IS NEUTRALIZED BY OMO's OR
  SWAP DESK
• THE UNCHANGED MONEY SUPPLY WILL CAUSE OTHER
  VARIABLES TO REMAIN UNCHANGED
• THE IMPACT WILL BE RESTRICTED TO EXCHANGE MARKET
  ONLY

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IMPACT THROUGH SBP BALANCE SHEET

• NDA NFA C DD TD
• HPM
• WHERE
• NFA F. A. F.L.
• F.A. INCLUDE GOLD, SDRs, FX RESERVES, DEPOs WITH
  OTHER C.Bs. UNCLASSIFIED ITEMS
• F.L. INCLUDE DEPOSIT OF OTHER C.Bs, SWAP FUNDS,
  IMF FACILITY, UNCLASSIFIED ITEMS
• CONTD.

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IMPACT THROUGH SBP BALANCE SHEET

• NDA D.A. D.L.
• D.A. INCLUDE CLAIMS ON GOVT., CLAIMS ON PVT
  SECTOR, CLAIMS ON SCHEDULED BANKS, OTHER ITEMS
  NET
• D.L. INCLUDE GOVT DEPO WITH C.B.
• OR NDA NCG (Net claims on Gov) CPS (claims on
  private sector) CSB (claims on Scheduled banks)
  OIN (other item net)
• OIN INCLUDE CAPITAL ACCOUNT, PROFIT LOSS
  ACCOUNT, SBP PROPERTY ETC

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IMPACT THROUGH SBP BALANCE SHEET

• ASSETS LIABILITY EQUITY
• SINCE OIN INCLUDES CAPITAL OF SBP
• THEREFORE,
• NFA (NCGCPSCSBOIN) LIABILITIES
• HPM

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CASE STUDIES

• CASE 1
• SBP TRANSFER Rs 1 BILLION PROFIT TO GOVT.
• OIN WILL GO UP
• NET CLAIM ON GOVT GO DOWN
• NDA REMAIN UNCHANGED
• NFA HPM UNAFFECTED
• GOVT.S BUDGETARY POSITION IMPROVE

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CASE STUDIES

• CASE 2
• SBP BUY 1,000,000 FROM INTERBANK MARKET ATR
  59.00
• NFA UP BY 1Rs 59 MIO
• NDA REMAIN UNCHANGED
• HPM GO UP Rs 59,000,000

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CASE STUDIES

• CASE 3
• SBP BUY 1MIO FROM KERB ATR Rs 60
• WHEN INTERBANK RATE IS STILL 59
• NFA UP BY Rs 59
• NDA UP BY Rs 1 through OIN
• Hpm up by Rs 60

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CASE STUDIES

• CASE 4
• LOAN FROM WORLD BANK
• GOVTs LIABILITY NOT SBPs
• NFA UP BY LOAN AMOUNT
• NDA UNCHANGED
• HPM UP

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CASE STUDIES

• CASE 5
• LOAN FROM IMF
• SBP LIABILITY
• NFA UNCHANGED
• NDA UNCHANGED
• HPM UNCHANGED

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SBP SWAP DESK

• SBPS SWAP DESK OPERATION
• TO MANAGE RUPEE LIQUIDITY
• AS SUBSTITUTE TO OMO
• TO MANAGE RESERVE POSITION
• TO MANAGE FUTURE RECEIPTS PAYMENTS
• TO MANAGE FORWARD PRICES

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• THANK YOU