CB says has enough “firepower” to deal with depreciating rupee

• Says absolutely no reason for volatility in exchange rate
• Terms recent deprecation a “normal demand and supply phenomenon”
• Acknowledges need for maintaining a competitive currency to boost exports

By Indika Sakalsooriya

The Central Bank yesterday described the recent sharp depreciation of the rupee against the U.S. dollar as a “normal demand and supply phenomenon,” and assured there’s no need for panic as the Central Bank has enough “firepower” to intervene if the situation warrants.

The rupee hit a fresh all-time low of Rs.157.75 per dollar yesterday, depreciating for the fourth straight session.

According to Reuters, the rupee has fallen 0.9 percent this week, 1.4 percent this month and 2.7 percent so far this year compared to the 2.5 percent fall in all of 2017.
“We feel that there is absolutely no reason why there is volatility in the exchange rate,” the Central Bank Governor Dr.Indrajit Coomaraswamy told reporters during a press conference held to announce the launch of the Central Bank Annual Report 2017, in Colombo, yesterday. He said Sri Lanka’s foreign reserves are currently touching US $ 10 billion for the first time in history and the government has just closed bids on a US $ 1 billion term loan, for which the response has been so good that consideration is being given to upscale it. Also, a further US $ 600 million is expected as the final tranche from the Hambantota port lease, which will also go into bolstering the foreign reserves. “So with all this flood of money coming into the country, there is absolutely no reason for the rupee to be under pressure. “If anybody puts it under pressure we have the firepower to make sure that the currency is maintained at its fair value.”

Governor Coomraswamy also acknowledged the need for maintaining a competitive currency to boost Sri Lanka’s export earnings in order to cut its foreign debt pile.
“It is important to have a competitive currency. As a rule of thumb, we would like the real effective exchange rate index to be 100 points. At the moment it’s slightly under 100. So the currency is slightly undervalued.”
But the Governor stressed that the exchange rate has been “broadly OK” in terms of providing a currency to support exports and foreign direct investment.  
“If there is misalignment between the trends in the market and the fundamentals, the Central Bank will intervene, though we don’t want to intervene and we want the market to develop,” he said.

Since April 2017, the Central Bank has been following a non-interventionist policy in determining the interest rate with the adoption of an inflation-targeting regime under an International Monetary Fund Extended Fund Facility programme. Meanwhile, Senior Deputy Governor Dr.Nanadalal Weerasinghe explaining the possible reasons for the recent rupee depreciation said, there is a lack of liquidity in the market place following the April New Year season.“During the festive season exporters and companies converted their dollar holdings to pay bonuses, salaries etc. “Then after the New Year, since the dollars have already been converted, there is a lack of liquidity in the market. So it is a case of demand and supply,” Weerasinghe said.

“But the question is whether we need to intervene. We have given the market the opportunity to decide the exchange rate based on demand and supply. But the Central Bank has the capability and right to intervene at any time if we feel that there is too much volatility,” he added.

Rupee extends losses, hits fresh all-time closing low

REUTERS:  The Sri Lankan rupee weakened to a record closing low yesterday as dollar demand from importers and banks surpassed the exporter greenback sales, dealers said.

The rupee closed at 157.75/95 against the dollar yesterday, weakening further from its previous record low of 157.60/75 hit on Wednesday.

The rupee has fallen 0.9 percent so far this week and 1.4 percent this month.

“There were some (dollar) conversions by exporters. But the demand was high from importers and also some foreigners selling (government) securities,” a currency dealer said. Some dealers said dollar purchases by oil importers, who usually buy dollars from banks, weighed on the currency. The rupee has weakened 2.7 percent so far this year. It dropped 2.5 percent last year and 3.9 percent in 2016. The International Monetary Fund said last week that the central bank should continue to remain vigilant in guarding against inflationary pressures, “while continuing to build reserves and supporting greater exchange rate flexibility”.