Rupee comes under pressure amid weaker inflows, slide in dollar conversion and deferred payments

The Sri Lankan rupee came under acute pressure last week amid a temporary drought in inflows, deferred payments for imports coming in and exporters showing reluctance to convert foreign currency, causing some liquidity shortfall in the dollar market.

But authorities maintain that the situation is a temporary aberration and will return to normal levels soon. 

According to State Minister for Money & Capital Markets, and State Enterprise Reforms, Ajith Nivard Cabraal, payments for certain imports, which got deferred last year, were seen coming into the market creating some pressure. “But that’s temporary and this condition will return to normalcy before long,” he said. The rupee was trading at 190.77/196.05 against the US dollar in the week ended on January 15 compared to 186.28/190.98 in the previous week ended on January 8. 

The forward rates also showed some depreciation in the local currency against the dollar. 

The one-month forward rate weakened to Rs.190.82 from Rs.188.57 in the previous week. 

The three-month forward rate wasn’t quoted last week, since volatility was high. However in the previous week, the three-month forward rate was quoted at Rs.187.93 for a dollar.  The Central Bank stepped into bring the situation under control,  and in December it said that it would “take appropriate action aggressively hereafter’ to contain this volatility in the domestic foreign exchange market”.  The Central Bank sold a little over US$ 22 million in December out of foreign reserves to stem the depreciation of the rupee. “Interbank FX market remained subdued while the forward volumes began to decline. Rupee experienced sharp depreciation in the second half of the month, a likely result of weaker FX inflows from exports compounded by the rating downgrade,” said ICRA Lanka, a rating agency. 

The first monetary policy for 2021 is due tomorrow and analysts expect the rate setting committee to maintain the status quo as the earlier monetary stimulus is continuing to influence the real economy by way of declining lending rates and increased loan disbursements to businesses.