Current uncertainty and depreciating trends in the Sri Lankan rupee against the US dollar could continue in coming weeks and see an outflow of dollars from Central Bank reserves, bankers and treasury dealers warned yesterday.
“It is anybody’s guess as to foreign exchange trends but I reckon the Central Bank (CB) won’t allow it to fall to any serious levels,” one dealer told the Sunday Times.
The dollar rose to Rs. 131 (per US dollar) on Thursday, the highest in seven months, and fell back to Rs. 130 on Friday. The dollar peaked at Rs. 135 in July last year, settled down to Rs. 130 in November and since then has been hovering at Rs.124-Rs. 126 until last week’s developments.
The falling rupee, however, was, purely due to economic developments in the US and not any local events, a senior CB official said, adding: “Even the Indian rupee fell sharply last week to Rs. 60.70 (per US dollar) against Rs. 54 in April this year.”
But bankers cautioned that this was one of the reasons why the Government or the CB should not depend on borrowed foreign reserves – instead of earned cash (export revenues). “When there is an outflow of dollars, then the Government has to return this money,” one city banker said.
Bankers and dealers also say the US economy is seen recovering with a possible increase in interest rates likely to happen, and these trends are impacting on emerging markets across the world. In Colombo, the rupee fell as the demand for dollars rose with foreigners pulling out investments in CB bonds and Treasury Bills and moving their investments to the US or other markets based on international trends — connected to US developments.
The CB intervened in the market either earlier in the week or the week before to contain any serious volatility. Bankers said with the economy showing signs of recovery, the US Treasury was expected to reduce the quantum of the $85 billion worth of bonds it was selling in the market, to raise cash for government spending.
“These bond sales created a lot of liquidity in the market and made it unattractive for investors who then took their money to emerging markets like Sri Lanka where there was a better return,” one banker said. Most countries, including Sri Lanka, raise money for Government expenditure through the sale of bonds, Treasury Bills or other instruments.
However, bankers said the situation was not as bad as in the second half of 2008 when there was an outflow of $600 million dollars after foreigners withdrew monies in CB bonds owing to the US financial crisis.(Sunday Times)