Domestic growth and improving investor sentiments fuelling rupee gains: BI

Sri Lanka’s strengthening recovery and improving investor sentiment have been fuelling recent rupee gains against US$ in defying regional and market trends, a report by Bloomberg Intelligence (BI) said.

Sri Lankan rupee rose 9.5 percent against US$ since the beginning of December last year, and has become one of best performing emerging market currencies in the world. Rupee continued to make gains while emerging market currencies recently hit a three month low.

According to Bloomberg

Intelligence’s foreign exchange decomposition model, domestic growth has contributed to 4.7 percentage points (ppts) of rupee’s rise, while improving investor sentiment is likely to have contributed to around 3.4 ppts. Sri Lanka’s economy grew by 1.6 percent YOY in 3Q2023 after contracting for six straight quarters and the growth accelerated to 4.5 percent YOY in 4Q2023. Meanwhile, several developments have buoyed investor sentiment, in particular progress of Imf-backed reform agenda and progress in the debt restructuring front.

It acknowledged that MF’S recent loan disbursements and the preliminary approval of another tranche on March 21, suggest that the country is keeping up with its mandated targets.

“Agreement in principle’ on debt restructuring with China, India and France and progress in reaching a debt restructuring plan with private bondholders have contributed to the recovery in investor sentiment.

“The authorities continued assurance that the negotiations will close productively keeping investors optimistic, boosting their purchase of rupee bonds,” it highlighted.

Meanwhile, weaker growth in the United States also contributed 1.3 ppts to rupee gains.

However, the monetary policy’s contribution to rupee gains was only 0.1ppts. It was noted that real rates are still higher than their long term average despite Central Bank having cut rates by 700 basis points since June.

“The support from the monetary policy has been declining due to expectations that the CB will cut rates further to boost growth,” it added.