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

1. LINKAGES BETWEEN FOREIGN EXCHANGE AND MONEY MARKETSBy Muhammad ArifSenior Joint DirectorFSCD

2. 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 • SBP’S SWAP DESK

3. CENTRAL BANK OBJECTIVES • EXCHANGE RATE STABILITY • RIGHT QUANTITY OF MONEY SUPPLY • INTEREST RATE STABILITY • INFLATION MANAGEMENT • MACRO ECONOMIC BALANCE

4. 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

5. TYPES OF INTERVENTION • STERILISED • UNSTERILISED

6. 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

7. 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

8. 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.

9. 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

10. IMPACT THROUGH SBP BALANCE SHEET ASSETS = LIABILITY + EQUITY SINCE OIN INCLUDES CAPITAL OF SBP THEREFORE, NFA + (NCG+CPS+CSB+OIN) =LIABILITIES = HPM

11. 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

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

13. 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

14. CASE STUDIES CASE 4 • LOAN FROM WORLD BANK • GOVT’s LIABILITY NOT SBP’s • NFA UP BY LOAN AMOUNT • NDA UNCHANGED • HPM UP

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

16. SBP SWAP DESK SBP’S SWAP DESK OPERATION • TO MANAGE RUPEE LIQUIDITY • AS SUBSTITUTE TO OMO • TO MANAGE RESERVE POSITION • TO MANAGE FUTURE RECEIPTS & PAYMENTS • TO MANAGE FORWARD PRICES

17. THANK YOU