Rupee appreciates as CB takes breather from dollar purchases

• US$ drops below Rs.300 for first time since April last year
• CB taking breather from dollar purchases to stimulate consumption 
• Sizeable contraction in imports also contribute for rupee to gain
• Analysts expect rupee/US$ exchange rate to stabilise around Rs.330-350 by end of this year

• By Nishel Fernando

Sri Lanka’s rupee further appreciated against the US dollar (US$) yesterday dropping below Rs.300 for the first time since April last year as the Central Bank (CB) took a breather from its dollar purchases to allow consumption to rebound.

According to CB, the buying and selling rates of US$ were at Rs.299.21 and Rs.312.37 yesterday.

“The main reason for the rupee appreciation was the Central Bank reducing US$ purchases by taking a breather,” Capital Alliance (CAL) Group Chief Strategist Udeeshan Jonas told Mirror Business. 

In the past four months, the CB has purchased over US$ 1 billion from the domestic foreign exchange market to build up the foreign reserves.

First Capital Research (FCR) Head of Research Dimantha Mathew added that the sizeable contraction in imports might have fueled the rupee appreciation, and said the recovery seen in tourism earnings and workers’ remittances inflows too would have helped. In addition, Jonas noted that people who were hoarding US$ have started exchange  them into Rupees due to the recent appreciation of the currency.

Commenting on why the CB has temporary halted its US$ purchases, Mathew opined that recovery in consumption could be the main intention of CB to drive economic recovery given the key role of imports in the economy.
“Since there’s slack in the system, they want to create some demand for imports in order to allow consumption to pickup to reasonable levels,” he said.

The CB also this week lifted the 100 percent cash margin requirements on letters of credit concerning imports.

Mathew expects a noteworthy recovery in imports in the second quarter of this year.

Jonas pointed out that a stronger rupee would also have a positive impact on key debt indicators such as debt to GDP ratio.

However, he viewed that the current trend of rupee appreciation is unlikely to last for longer given CB’s year-end foreign reserve targets and pressure coming from imports.

“After bringing the currency up to the level of Rs.300, CB is likely to come back and resume buying. It’s unlikely this scenario will continue, unless we receive large inflows from multilaterals such as the World Bank (WB) and ADB,” he added.

Sri Lanka is required to build its official foreign reserves to US$ 4.2 billion by end of this year, which includes US$ 1.4 billion from market purchases as per the IMF programme. 

Jonas said that IMF is likely to ask the authorities to remove the remaining import restrictions given recent improvements in the forex front.

“If you are building reserves and reaching the numbers easily, the IMF would want us to lift the remaining restrictions on imports. They would not allow us to keep restrictions in place while the currency is appreciating,” he added.

Analysts expect the rupee/US$ exchange rate tostabilise around Rs.330-350 by end of this year. The rupee so far during the year has appreciated around 16 percent against the US$.