Rupee falls to lowest ever

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By 2017-04-21

By Paneetha Ameresekere

In a sea of inflows witnessed by the financial markets these days, the exchange rate (ER) paradoxically fell to its lowest ever value, with its average buying rate quoted for telegraphic transfer (TT) among commercial banks declining... ..sharply by Rs 0.23 to Rs 154.40 to the US dollar yesterday, data showed.

The previous lowest it had ever fallen to was Rs 154.21, which was on 23 February. Pressure for the ER to depreciate is caused by the Government of Sri Lanka's (GoSL's) foreign debt servicing commitments. Central Bank of Sri Lanka (CBSL) Governor Dr. Indrajit Coomaraswamy speaking to reporters on 24 March said that GoSL's foreign debt servicing commitments, from that time to the year end, was US$ 1.9 billion.
Though foreign debt servicing commitments are off market operations, where such commitments are met from CBSL's foreign reserves which are also a cost to the market's excess liquidity position, thereby causing upward pressure on rates.

Nonetheless, such actions have a perceived negative impact on the market, leading to importer panic, thereby causing further depreciative pressure on the rupee. Nevertheless, yesterday saw the ER, in interbank foreign exchange (FX) trading, amidst heavy volumes, appreciating by Rs 0.20 to Rs 153.15/25 to the US dollar in two way quotes in two weeks' forwards, due to the probable misconceived belief by the market that the current inflows into the financial market (Bourse and the government securities market) are ipso facto, market operations.

But, inflows/outflows to the financial markets are also off market operations, similar to foreign debt servicing commitments, where those are transacted on the current benchmark, but administered 'spot' rate of Rs 151.90 to the dollar in interbank trading. 'Spot' trades are settled after two market days from the date of transaction. Such inflows have to be mandatorily sold to the CBSL, thereby boosting its reserves, by the market (receiving banks) thereby, bypassing the FX market.

This also shows that foreign investors get a superior price for their dollars. Whereas a foreign investor in the financial market will get paid Rs 151.87 for each dollar sold (administered 'spot' price minus Rs 0.03 being bank commission), a local selling dollars will be paid a mere Rs 150.60 for a dollar, with the latter being the average buying rate for TT among banks as at yesterday. This gives a foreigner an advantage of Rs 1.27 (0.84%) for each dollar sold vis-à-vis a local engaging in the same.

CBSL deals in 'spot' in such transactions.
In related developments, CBSL, on behalf of GoSL, printed Rs 14,464 million to help the latter to meet its various monetary commitments. As a result, money printing (MP) increased by 4.35% to Rs 346,818.18 million. Those MP figures also include related borrowing costs to GoSL due to MP.
The net result was such MP borrowing costs increasing by Rs 108.94 million (1.38%) to Rs 7,791.95 million. Meanwhile, the money market enjoyed a marginal net foreign inflow of Rs 277 million (US$ 1.83 million) yesterday, thereby uplifting net excess liquidity, together with MP, by Rs 14,741 million (43.73%) to Rs 48,451 million. Conversions are based on the administered 'spot' rate as at Tuesday which was Rs 151.90 to the dollar.



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