KARACHI, Dec 31: The rupee lost 3.5 per cent of its value against the dollar in 2004 despite the State Bank moves made in the last quarter to stabilize it.

The rupee closed at 59.43 a US dollar in the inter-bank market at end-December 2004, down from 57.40 a dollar at end-December 2003. See chart for the official rupee-dollar exchange rates at the end of each month.

As the chart shows the rupee moved in a narrow band of 57.43-57.69 a dollar during the first five months of the outgoing year. But from June, it started falling and touched the lowest level of 61.37 a dollar at end-October.

It, however, recovered swiftly as the central bank started selling dollars to banks for financing oil imports from November 1. This, coupled with tighter checks imposed on foreign exchange dealings, lifted the rupee to 59.69 at end-November and then to 59.43 at end-December.

The rupee came under pressure in June 2004 as trade deficit during April-June quarter shot up to $1.6 billion or half the total deficit of $3.2 billion in the entire fiscal year July-June 2003-04. It was also in 2004 that the rupee slipped below the crucial level of 58 a US dollar at which the central bank had defended it for a long time.

The financial market saw a huge trade deficit in April-June 2004 as a strong indication that rupee would come under further pressure and that set in motion a self-fulfilling prophecy cycle.

As a result, the rupee kept falling throughout the next quarter and it lost 1.9 per cent value against the dollar during this period. The rupee shed this much value against the dollar in July-September 2004 despite the fact that the trade deficit during this quarter was $839 million, much lesser than what it was in April-June.

While the rupee fell below the psychologically important levels of 58 a dollar and 59 a dollar in June and in September 2004, it quickly licked two new lows -- 60 a dollar and 61 a dollar both in October.

The local unit remained extremely volatile during that month and finally closed at 61.37 a dollar after losing 3.6 per cent value against the greenback within one month.

What caused a free fall of the rupee in October was that oil prices were rising steeply in the world markets and bankers and exporters and importers were of the view that it would put further pressure on the rupee and had started behaving accordingly. Besides, the trade deficit in October 2004 had shot up to $591 million from $170 million in October 2003.

Between January-October 2004, the rupee depreciated by 6.9 per cent despite the fact that the central bank continued selling dollars to stabilize the local unit during this period.

In addition to the factors listed above, pre-payment of $1.17 billion expensive debt of the Asian Development Bank by the government followed by ahead-of-schedule retirement of $350 million Japanese loan by Pak-Arab Refinery Company (Parco) in January and in July 2004 respectively also had led to the weakening of the rupee, though with a time lag.

From November 1, the State Bank not only started selling dollars to banks to finance oil imports but it also tightened rules for operation of inter-bank foreign exchange market and imposed curbs on advance payments of import bills. These moves helped the rupee regain 2.7 per cent of its lost value against the dollar in November and 0.4 per cent in December.