ER Stabilising At Rs. 132.30 Levels

The exchange rate (ER) which opened Thursday morning at the Rs. 132/35/40 levels to the US dollar ($) in two way quotes in spot, interbank trading, strengthened during the day to be quoted at the Rs. 132/25/30 levels on thin volumes by the afternoon, a market source told this newspaper.
Friday was a holiday to the market because of Poya.
There was no state intervention to protect the ER, he said.
Another source claimed that the ER in the past two months had had depreciated by a mere 50 Sri Lanka cents (SLc), ie from Rs. 131.80 to the Rs. 132.30 levels, giving an indication that it has stabilized at these prices.
“It has fallen from Rs. 110 levels from the recent past to the current levels, one cannot expect it to continuously decline,” he added.
Meanwhile at the beginning of last week, the ER which fell sharply by 33 SLc at Monday’s (August 27) trading over its previous day’s (August 24) close to finish the day at Rs. 132.60 to the $ in spot, interbank trading on the back of import demand, recovered most of those losses the following day Tuesday to close at Rs.132.30.
It virtually held on to those levels the following day Wednesday, with two way quotes going at Rs. 132/30/40 on thin volumes, a source said.
Another source commenting on Tuesday’s gains after the previous day’s fall said that they were due to a mix of state intervention in the morning (Tuesday), coupled with exporters encashing their $ proceeds. He placed trading volumes at between $30-40 million, including those comprising forward bookings.
The source said state owned Central Bank of Sri Lanka (CBSL) intervened in the market through another state owned entity, namely Bank of Ceylon (BoC), a commercial bank, by offering $s to the market at the Rs. 132.40-132.50 levels at Tuesday’s trading.
He however deemed this action of BoC’s as not being interventionist, but as a measure of bringing stability to the market. “This sort of action amounts to a mere $ 3-4 million, not like the several hundreds of millions of dollars that CBSL/Government of Sri Lanka (GoSL) expended in the recent past by trying to defend the local currency at the Rs. 110 levels or thereabouts then,” the source said.
Even the Central Bank of Japan indulges in market intervention similar to that which happened on Tuesday, he said.  Meanwhile the ER at Monday’s (August 27) trading weakened by 33 SLc over its previous day’s (August 24) close to finish the day at Rs. 132.60 to the $ in spot, interbank trading on the back of import demand. Previously, one market source said that CBSL will defend the ER at the Rs. 132.50 level (see the business pages of last week’s The Sunday Leader issue), ie by not allowing it to fall below that figure, while another however predicted that CBSL’s new, protectionist barrier for the ER would be at the Rs. 133 level (previously it had protected it at the Rs. 132 level). But with CBSL seemingly allowing the ER to pass the Rs. 132.50 barrier on Monday’s interbank trading, it’s now left to be seen in the event the ER continues to be dragged down by import pressure and comes down closer to the Rs. 133 level, what action CBSL would take to prevent its further fall, if it indeed does have such a plan.
However the following day Tuesday saw the ER virtually erasing all of the previous day Monday’s losses and holding on to those levels on Wednesday and Thursday as well.
CBSL generally protects the ER by drawing down from its foreign exchange (forex) reserves and selling $s to the market at administered prices, ie at prices which are below market prices. But the flip side in such an activity is that it brings down the country’s forex reserves.
Additionally such activity also draws down market’s excess rupee liquidity as the market has to pay CBSL in rupees to make its $ purchases from the same. When liquidity diminishes that causes upward pressure on rates, thereby making borrowings more expensive to investors as well, which may  stultify business expansion, the starting of new businesses and therewith employment, income and growth, a scenario ripe for a poor country  such as Sri Lanka to fall prey to social and political instability.
Meanwhile market’s excess liquidity diminished by 26.6% (Rs. 1,286 million) to Rs. 3,554 million on Monday, over its previous day’s close, but in the following day’s trading (ie on Tuesday) it more than wiped out these losses to return a Rs. 5,931 million excess liquidity figure probably due to foreign inflows, whilst further increasing it to Rs. 8,720 million the following day Wednesday, before closing the week at Rs. 11,173 million. Nevertheless call money transactions (ie interbank borrowings for a day) increased by three basis points (bps), fetching a 10.58% weighted average rate (WAR) over that of the previous day Wednesday’s close, after remaining stagnant at 10.55% in the first three days of last week, whilst maintaining that same rate last Friday (August 24) as well. Similarly gilt edged Treasury (T) Bill backed market repo rates (ie the rate/s at which commercial banks and primary dealers borrow from each other for a day) also increased by five bps to 9.60% on Thursday (over that of the previous day Wednesday’s WAR),  after declining by one bp to 9.55%  on Wednesday over Tuesday’s 9.56% WAR.
On Tuesday it increased by one bp to 9.56% (over that of the previous day Monday’s WAR). Last Friday too its figure was 9.55%, the same as that of Monday’s WAR.
The weighted average yield of the overnight repo auction (an activity of CBSL to drain out excess liquidity from the market) however stagnated at the 9.43% level during the review period (see also connected story found on page 33).
A weak ER makes the prices of essential import goods such as medicines, sugar and dhal more expensive to the consumer, hitting the poor and the fixed wage earner the hardest.
Government of Sri Lanka/CBSL in recent times has had adopted several measures to bring down its import bill in an attempt to lessen pressure on the rupee, made worse by a yawning trade deficit.
Those include allowing for a flexible ER (which has had resulted in the sharp depreciation of the same by 20%), hiking policy rates, uplifting administered energy prices and increasing the administered prices of certain other essentials such as bread, cement and bus fares as well.
Due to the economic crisis in Europe exports have had fallen (see also the business pages of this newspaper’s last week’s edition), a situation which does not help the island to reduce its trade deficit nor pressure on the ER. EU is Sri Lanka’s biggest export market.
Neither has foreign direct investments (FDI) picked up at a speed that may have had been expected in a post war scenario.
FDI inflows are another conduit to strengthen/stabilize a weak rupee (see also the business editorial found on page 35).  But if such inflows are slow, that doesn’t help to mitigate the economic crisis to which Sri Lanka has fallen into.