Rupee gets weaker despite CB talk

Despite Central Bank comments the rupee weakened towards a recent record low on Tuesday as importers bought dollars to settle trade bills.
The rupee closed at 113.13/113.18 per dollar, below Monday’s close of 112.98/113.02 and close to last Wednesday’s record trough at 113.12/113.20.

“The rupee ended slightly weaker on importer demand on dollars to settle trade bills,” one currency dealer was quoted as saying by Reuters.
The local currency has hit a series of all-time lows in recent months. Sri Lanka runs a trade deficit because of costly fuel imports and this has been weighing on the exchange rate.

Some analysts see the rupee declining to 114 per dollar while others say it could fall as far as 118-120 by the end of the year. It has fallen 5 percent so far this year.

The overnight interbank or call money rate fell to 18.048 percent, from Monday’s close of 19.160 percent, as calculated on a weighted average. ($1= 113.15 rupees)
On Monday rupee ended firmer for the third day in a row moving further off a recent record low due to a squeeze in the overnight money market and steps last week to ease currency trading restrictions.
The performance of the rupee vis a vis the US dollar is despite Central Bank last week issuing a statement that speculation was unwarranted.
The Bank said during the past two weeks (16 – 29 Aug), the Sri Lanka Rupee depreciated by 0.99% against the US Dollar. However, the external sector performance, as set out below clearly indicates that such depreciation is not based upon any fundamental macroeconomic factors.

Export earnings continued to increase during the first half of 2007 outperforming the high growth recorded in the same period in 2006. Exports during the first half grew by 12.9 per cent from US dollars 3,162 million in 2006 to US dollars 3,569 million in 2007. Meanwhile, imports grew modestly by 3.9 per cent to US dollars 5,150 million during the first half of 2007 compared to US dollars 4,995 million in the first half of 2006. As a result of higher growth of exports over the growth of imports, the trade deficit in the first half of 2007 narrowed down to US dollars 1,581 million from US dollars 1,793 million in 2006.

Worker remittances by Sri Lankan migrants increased significantly by around 18 per cent to US dollars 1,314 million in the first half of 2007. The remittances helped to finance around 83 per cent of trade deficit in the first half of 2007. The Foreign Direct Investment (FDI) is estimated to have increased substantially during the first half with the large number of projects contracted during this period with the fast track approval procedure adopted by the Board of Investment. The realised FDI during the first half of 2007 amounted to over US dollars 260 million as compared to US dollars 200 million in the corresponding period in 2006. Financial flows to government too increased substantially during the first half of 2007 to US dollars 603 million as compared to US dollars 358 million during the same period in 2006.

As a result of all the above strong external sector developments, the overall balance of payments (BOP) recorded a surplus of around US dollars 151 million during the first seven months of 2007. Reflecting the BOP surplus, the gross official reserves (excluding ACU receipts) increased to US dollars 2, 681 million by end July 2007 from US dollars 2,526 million at end 2006. The reserves at end July 2007 are sufficient to finance about 3 months of imports.

The external competitiveness as measured by the movements in the 24 currency Real Effective Exchange Rate (REER), depreciated by 2.4 per cent during the first seven months of 2007 indicating improvement in the external competitiveness of Sri Lanka.

Evaluating recent economic developments in all sectors of the economy and looking at prospects of Sri Lankas overall economic performance, the international credit rating agency Standard & Poor’s (S & P) revised Sri Lanka’s sovereign rating outlook from “negative” to “stable” in August 2007. The ratings reflect the country’s favourable medium-term growth prospects.

“Based on strong economic fundamentals particularly in the external sector, the Central Bank is of the view that the depreciation of rupee that has taken place during the past 2 weeks is unwarranted,” the Bank said.

Analysts said that the behaviour of the forex market suggests otherwise.