(CT) Rupee down 2.54-2.61% YoY

By Paneetha Ameresekere

The benchmark ‘spot’ held at the Rs 153.20/30 levels to the US dollar on thin trades at Friday’s (15 December) trading, a contrast to what took place a year ago on Thursday, 15 December, 2016, where the market exchange rate (MER) then, namely ‘spot next,’ fell sharply by 30 cents to Rs 149.40 to the dollar.

Year on year (YoY) as at Friday, the MER has depreciated by between Rs 3.80-3.90 (2.54-2.61 per cent), thereby causing cost push inflation.While Friday’s squaring off of the ER may be attributed to both exporters and importers having had fulfilled meeting their commitments for the year, the sharp dip of the MER a year ago was due to the Federal Reserve System increasing its key policy rate,

the Federal Funds Rate (FFR) by 25 basis points (bps) to 50 to 75 bps then, coupled with expectations that the Fed would raise the FFR thrice this year.The Fed did raise the FFR thrice this year as expected, by 25 bps each, with the last increase having had been made on Wednesday (13 December) with the FFR currently at between 1.25-1.50 per cent. Nonetheless, there is no pressure on the ER now, principally due to the Government of Sri Lanka (GoSL) embarking on a budgetary consolidation process, thereby assuring investors of a stable ER.Previously GoSL used to borrow in dollars to fund the budget deficit, which pressure is now absent.When interest rates in the world’s largest economy increase, there is a tendency for foreign exits, to re-park their investments in US based assets. But that pressure now has been allayed due to GoSL’s budgetary consolidation process.A year ago, the ‘spot’ which was administered then, to minimize GoSL’s rupee debt servicing commitments, was also devalued by 20 cents to Rs 149.10 to the dollar, then. Now, however, the ‘spot’ has been liberalized.YoY as at Friday, the MER has depreciated by between Rs 3.80-3.90 (2.54-2.61 per cent), thereby causing cost push inflation. ‘Spot’ trades are settled after two market days from the date of transaction, whereas in the case of ‘spot next’ it’s three. Central Bank of Sri Lanka (CBSL) deals in ‘spot.’

The ‘spot’ at times is controlled to minimize Sri Lanka’s rupee debt costs. Usually the Treasury is bereft of dollars unless it has raised dollars by a syndicated loan or by a sovereign bond or by a similar such vehicle. Nonetheless, more often than not, such costs are met from CBSL’s foreign reserves after buying the required greenbacks by paying CBSL it rupee value in ‘spot’ equivalents. Therefore, a weak ‘spot’ will only inflate GoSL’s rupee debt stock. To prevent such a scenario GoSL exerts moral suasion on the ‘spot’, like what happened on 7 October, 2016.
The foreign exchange market is avoided to meet GoSL’s foreign debt servicing commitments for fear that that would cause depreciative pressure on the rupee.

Source: Ceylon Today

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