The economic observers foresee the headline inflation for FY12 setting around 11.2 percent due primarily to active liquidity management by the central bank and a relatively improved foreign exchange reserves held by the banks.
Whereas the State Bank continues to inject billions, almost every week, in the cash-strapped banking system, the economic managers are taking comfort from a stable position of dollar reserves, accumulating to $ 16.441 billion up to March 23, the central and commercial banks are possessing.
“(The) pressure of rupee depreciation on inflation subsided for now owing to active float management by the central bank and improved USD reserves lying with banks,” viewed Farhan Bashir Khan of InvestCap.
The central bank injected in the system over Rs 543 billion, Rs 223.050 billion on March 26 and Rs 320.450 billion on March 16, after moping up Rs 3 billion on the 13th of this month to help the liquidity market float in balance.
Another positive the analysts see is the net domestic and foreign assets of the banks that, they believe, were depicting much lower deterioration compared to the broad trend.
According to SBP data, during July-March 16 (FY12), the banks’ Net Foreign Assets stood at negative Rs 225 billion against positive Rs 177 billion of last year’s corresponding period. While the Net Domestic Assets of the banks swelled to Rs 731 billion against Rs 364 billion of FY11.
“We expect full year headline inflation for FY12 to reside around 11.2 percent. Whether this should provide room for monetary easing is an altogether different question,” analyst Khan said. Dubbing inflation no longer a prime concern for the economic managers in short run, the analysts said imbalances on the fiscal and external fronts coupled with tight liquidity conditions were appearing to be much broader concerns for the country from monetary policy point of view. However, given the government’s ever-increasing budgetary bank borrowings, which have swelled beyond Rs 923 billion during July-March period, the analysts said the central bank was likely to keep the discount rate unchanged at 12 percent for the rest of FY12. More worrisome is the fact that the cash-strapped government’s overall borrowings for budgetary support had swelled to Rs 1 trillion or 4.6 percent of the country’s Gross Domestic Product.
“Borrowing from SBP has crossed Rs 235 billion, which is highest level so far during FY12,” said the InvestCap analyst adding “Over and above, inflation might pop back up as a leading concern during FY13 as an aftereffect of current liquidity and money supply trends.”
Therefore, Khan said, the regulator may be expected to stay the 12 percent discount rate with possibility of subsequent tightening.
About monthly inflation position, Khan said the price hike was expected to stand at 11.10 percent in March, up 1.45 percent over the previous month.
“We see current monthly inflation sustaining forward for remainder of this year,” the analyst said adding that “Greater oil prices, possible supply shocks, seasonality as well as trickle down cost push pressures to play a wider role in coming quarter”.
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