Rupee ends steady; gradual depreciation seen

REUTERS: The Sri Lankan rupee gave up early gains but ended steady yesterday as late importer dollar demand offset selling of the greenback by exporters.

The local currency is expected to be under pressure due to the Central Bank’s dollar buying plan, dealers said.

The spot rupee closed at 153.70/73 per dollar, hardly changed from Friday’s close of 153.70/75.

“The market expects the rupee to depreciate further as the Central Bank is allowing a gradual depreciation,” a currency dealer said, asking not to be named. “We expect a 4 percent depreciation for this year.”

The rupee has fallen around 2.6 percent so far this year. Central Bank Governor Indrajit Coomaraswamy said the rupee was still “overvalued” and that the Central Bank was still buying dollars to avoid any appreciation.

“What people don’t understand is an overvalued rupee is subsidy to foreign producer at the expense of local producers. You are actually subsidising foreign exporters and producers of import substitutes,” he told Reuters yesterday.

He also said the Central Bank had bought dollars in the range of US $ 750 million to US $ 800 million from the market, out of the US $ 1.2 billion it had planned to purchase in the 10 months from March this year.

The Central Bank is compelled to buy dollars from the market to meet the reserve target set by the International Monetary Fund under a US $ 1.5 billion, three-year loan programme.

The market has priced in further depreciation due to the Central Bank’s no-intervention policy to defend the currency, dealers said.

The rupee has been under pressure since early this year after the Central Bank stopped providing support for the currency at a time when the island nation faces a balance of payments crunch. The spot rupee resumed trading on June 19 for the first time since May 5, when the Central Bank fixed its reference rate at 152.50. Seasonal demand for dollars is expected to pick up from August, dealers said.