Rupee poised to appreciate in the second half of 2012-Report

Despite several short-term challenges, the Sri Lankan rupee may appreciate to Rs 128 against the dollar over the course of the third and fourth quarters of this year, according to a report from Standard Chartered.

Citing a gradual global revival of risk appetite, alongside favorable domestic economic policy measures, the report stated that the current shortage of onshore US dollars could show signs of improvement as sentiment towards the LKR improves.

Improvements to the Balance of Payments were amongst favorable macroeconomic indicators mentioned in the report.

Sri Lanka’s BoP deficit narrowed from US$ 1.1 billion in the fourth quarter of 2011 to US$ 251 million in the first quarter of this year as measures to limit import demand took hold and despite a parallel slow- down in exports on the back of a weak global economic environment.

Despite such factors however, the report stated that prospects for the LKR over the medium term were positive with appreciation of the rupee sustained appreciation of the rupee anticipated from late into Q3 and through Q4.

The report’s positive medi- um term outlook on the rupee were however contingent on the disbursement of the final US$ 430 million trance of the International Monetary

Fund’s Stand By Arrangement, in addition to the upcoming sovereign bond issuance and reports of further IMF funding in the form of a US$ 500 million security arrangement upon completion of the SBA, which in combination are expected to return the country’s balance of payments to a US$ 0.9 billion surplus.

The report also projected an increase in inflation to 7.2%, as compared with the Central Bank of Sri Lanka’s current projection of 7% while interest rates were anticipated to be held at their current levels of 7.75% and 9.75%,for repo and reverse repo rates respectively. (CF)