Daily Mirror (Sri Lanka)

Rupee appreciate­s as CB takes breather from dollar purchases


■ „US$ drops below Rs.300 for first time since April last year

■ „CB taking breather from dollar purchases to stimulate consumptio­n

„■ Sizeable contractio­n in imports also contribute for rupee to gain

■ „Analysts expect rupee/us$ exchange rate to stabilise around Rs.330-350 by end of this year


Sri Lanka’s rupee further appreciate­d against the US dollar (US$) yesterday dropping below Rs.300 for the first time since April last year as the Central Bank (CB) took a breather from its dollar purchases to allow consumptio­n to rebound.

According to CB, the buying and selling rates of US$ were at Rs.299.21 and Rs.312.37 yesterday.

“The main reason for the rupee appreciati­on was the Central Bank reducing US$ purchases by taking a breather,” Capital Alliance (CAL) Group Chief Strategist Udeeshan Jonas told Mirror Business.

In the past four months, the CB has purchased over US$ 1 billion from the domestic foreign exchange market to build up the foreign reserves.

First Capital Research (FCR) Head of

Research Dimantha Mathew added that the sizeable contractio­n in imports might have fueled the rupee appreciati­on, and said the recovery seen in tourism earnings and workers’ remittance­s inflows too would have helped. In addition, Jonas noted that people who were hoarding US$ have started exchange them into Rupees due to the recent appreciati­on of the currency.

Commenting on why the CB has temporary halted its US$ purchases,

Mathew opined that recovery in consumptio­n could be the main intention of CB to drive economic recovery given the key role of imports in the economy.

“Since there’s slack in the system, they want to create some demand for imports in order to allow consumptio­n to pickup to reasonable levels,” he said.

The CB also this week lifted the 100 percent cash margin requiremen­ts on letters of credit concerning imports.

Mathew expects a noteworthy recovery in imports in the second quarter of this year.

Jonas pointed out that a stronger rupee would also have a positive impact on key debt indicators such as debt to GDP ratio.

However, he viewed that the current trend of rupee appreciati­on is unlikely to last for longer given CB’S year-end foreign reserve targets and pressure coming from imports.

“After bringing the currency up to the level of Rs.300, CB is likely to come back and resume buying. It’s unlikely this scenario will continue, unless we receive large inflows from multilater­als such as the World Bank (WB) and ADB,” he added.

Sri Lanka is required to build its official foreign reserves to US$ 4.2 billion by end of this year, which includes US$ 1.4 billion from market purchases as per the IMF programme.

Jonas said that IMF is likely to ask the authoritie­s to remove the remaining import restrictio­ns given recent improvemen­ts in the forex front.

“If you are building reserves and reaching the numbers easily, the IMF would want us to lift the remaining restrictio­ns on imports. They would not allow us to keep restrictio­ns in place while the currency is appreciati­ng,” he added.

Analysts expect the rupee/us$ exchange rate tostabilis­e around Rs.330-350 by end of this year. The rupee so far during the year has appreciate­d around 16 percent against the US$.

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