Uncertainty overtakes markets ‘Spot’ falls steeply by 75 cents

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By 2018-02-14

BY Paneetha Ameresekere

The benchmark 'spot' fell by a massive 70 to 75 cents in the interbank foreign exchange (FX) market on 12 February to close the day at Rs 154.90/155 to the US Dollar in two way quotes due to the political uncertainty in the country now fixed for at least two years after former President Mahinda Rajapaksa's Sri Lanka Podujana Peramuna (SLPP) surprisingly swept the Local Government polls on 10 February. On the previous working day, 9 February, the 'spot' had closed stronger at Rs 154.20/25 to the Dollar in two way quotes. The country's Parliamentary and Presidential Elections are due in 2020.

In the calendar year to date, the 'spot' has fallen by Rs 1.40 (0.91 per cent), having had closed last year at Rs 153.50/60 to the Dollar in two way quotes. Further, year on year as at 12 February, the market exchange rate declined steeply by Rs 3.65 (2.41 per cent), having closed on 9 February, 2017 at Rs 151.25/35 to the Dollar in two way quotes in two weeks' forwards. Friday, 10 February, 2017 was a Poya, a bank holiday to the market.

The 'spot' then was bridled by the Central Bank of Sri Lanka (CBSL) at Rs 150.75 to the Dollar to minimize the Government of Sri Lanka's (GoSL's) rupee debt servicing commitments as the GoSL's US Dollar denominated debt commitments are met from the CBSL's foreign reserves after buying the same in Rupee equivalents. As a result, the market then was dealing in two weeks' forwards to find the true value of the Dollar.

However, currently, the 'spot' operates in a liberalized environment. The GoSL avoids buying Dollars from the interbank FX market to service its foreign debt servicing commitments for fear that such an action would cause further deteriorating pressure on the Rupee. A weak Rupee cause inflationary pressure as Sri Lanka is an import dependent economy. "Volumes, however, at trading on 12 February were thin," sources said.

The market was driven on 12 February by foreign exits from the Government securities market, albeit on thin volumes and import demand, they said.

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