Today’s monetary policy announcement of reducing policy rates by 250 basis points had a negative effect on the benchmark ‘spot,’ which sharply fell by between Rs four and Rs 3.50 to be trading at Rs 294.00/294.50 to the US dollar in two way quotes, market sources who didn’t want to be named told ‘BMD.’
When interest rates rise that weakens the demand for dollars due to the high cost of borrowings, resulting in the strengthening of the rupee (‘spot’), but when interest rates fall, that reduces borrowing costs, while simultaneously increasing importer appetite, resulting in the weakening of the ‘spot.’ Nonetheless, a weak rupee causes cost-push inflationary pressure as Sri Lanka is an import dependent economy.
However, year on year (YoY) to today the ‘spot’ has steeply gained by between Rs 66 and Rs70.50 (18.33-19.32 per cent) to the dollar in two way quotes. The overall strengthening of the rupee is after the Government of Sri Lanka (GoSL) and the Central Bank of Sri Lanka (CBSL) entered into an IMF Staff level agreement for the release of a USD three billion Extended Fund Facility (EFF) spread over a four year period, with the first tranche of $ 330 million released in March itself.
CBSL buys dollars from the market to strengthen the country’s parlous foreign reserves, but at the expense of weakening the rupee, but when there is a ‘pause,’ that helps to strengthen the rupee, due to a lack of dollar demand led by import controls and bans.
A year ago the ‘spot’ was trading unchanged for the twelfth consecutive market day to 1 June 2022 at Rs 360/365 to the dollar in two way quotes, statistics also showed. Meanwhile, CBSL strengthened the administered ‘spot for the seventh consecutive market day to today, this time too sharply, ie by 1.04 per cent (Rs 3.06) to Rs 292.46 to the dollar. A year ago CBSL artificially strengthened the administered ‘spot’ by 0.18 per cent (65 cents) to Rs 360.11 to the dollar, nonetheless seeing a steep YoY strengthening of the official ‘spot’ by 18.79 per cent (Rs 65.65) to the dollar, YoY to today.
‘Spot’ trades are settled after two market days from the date of trading. CBSL the steward of GoSL debt and of its foreign reserves deals in the official ‘spot.’ The official ‘spot’ is usually artificially propped up to minimize the cost of GoSL’s foreign debt in rupee terms and also to minimize GoSL’s foreign debt servicing costs in rupee terms.