ICRA Lanka expects rupee to hold up value despite headwinds

Rating agency ICRA Lanka says the rupee would hold up its value through the end of the year as exports and remittances remain strong amid controls in place on non-essential imports and less than a half billion dollars in debt remaining to be settled this year.

Sri Lankan rupee closed at 184.6113 against the United States dollar at the spot market on Monday, tad weaker from the previous close of Rs.184.437.

However the forward rates—a clear gauge for where the rupee could end up in a month or three months time—indicated a slight appreciation. 

“We expect the exchange rate to remain broadly stable as markets have already factored in most of the shocks,” ICRA Lanka said in their economic forecast released this week, adding that they “do not expect the exchange rate to experience significant pressure assuming import controls to remain in effect for 
the rest of 4Q.” 

However, the rating agency cautioned of possible softening of the exports volume momentum from factory shutdowns due to the isolation of areas identified for virus carriers. 

“The factory shutdowns could affect the export volumes moving forward which in turn negatively affect the trade balance,” ICRA Lanka said.

Sri Lanka has further narrowed its trade deficit in September to US$ 525 million from US$ 757 million in the same month in 2019, bringing the total deficit down to US$ 4.3 billion during the nine months from US$ 5.6 billion recorded in the comparable period last year. 

Meanwhile, the September remittances income eclipsed the last year’s levels by more than 36 percent to record US$ 702.7 million to flip the first nine months receipts to a gain of 2.4 percent to US$ 5,048.8 million. 

On November 6, the one-month forward rate was quoted at Rs.184.45 against the US dollar while the three-month forward was quoted at Rs.184.54, both rates indicating an appreciation from Rs.184.50 and Rs.184.57 a week ago.

Sri Lankan rupee appreciated by a marginal 0.3 percent in September against the US dollar and robust exports earnings, stronger remittance income, lower crude oil prices, controls on non-essential imports and non-market debt flows helped to contain the rupee depreciation to 1.5 percent through November 6 from the beginning of this year.