CBSL Protects Rupee
By Paneetha Ameresekere
Central Bank of Sri Lanka’s (CBSL) defence of the rupee, from the country’s foreign reserves, prevented the exchange rate (ER) breaching the Rs 200 mark amidst a culture of fear anxiety and uncertainty, due to the impingement created by the external sector on the country’s political domain, led by persistent net foreign outflows from the bourse at yesterday’s trading as well, market sources told this reporter.
Consequently the ER weakened by a mere 50 cents to be trading at Rs 198/199 to the US dollar in two way quotes vis-à-vis ‘spot next’ and up to one month’s forwards, the most popular foreign exchange (FX) instruments in the market these days due to controls on the benchmark ‘spot’ as at 4 p.m. yesterday, they said.
However, in the calendar year to yesterday the ER has sharply weakened by Rs 10.50 (5.60-5.28 per cent) in two way quotes in the FX market, thereby causing cost-push inflationary pressure as Sri Lanka is an import dependent economy. Meanwhile, the persistent spread of 100 cents between the ‘buy’ and ‘sell’ quotes of the ER in the FX market is a reflection of the uncertainty pervading the market currently, sources said. The ‘spot’ is controlled to minimise Government of Sri Lanka’s foreign debt in rupee terms. GoSL deals in ‘spot.’
In like gloom and doom developments, the country’s foreign reserves bled for the sixth consecutive market day to yesterday, this time by US$ 20.03 million (Rs 3,902 million) and in the six consecutive market days to yesterday by $504.23 million (Rs 98,227 million) due to the settlement/s of GoSL’s foreign debt servicing commitments and/or due to Central Bank of Sri Lanka’s (CBSL’s) protection of the rupee from depreciative pressure in the market and/or due to CBSL returning maturing swapped dollars to the market. This hypothesis discounts the possibility that a part or all of these changes are due to the settlement/s of CBSL selling dollars to GoSL. Transactions between GoSL and CBSL are foreign reserves neutral. CBSL, in its daily open market operations, lacks transparency
vis-à-vis the dynamics pertaining to such fluctuations. In other developments, GoSL’s money printing borrowing costs (MPBCs) sharply fell for the fifteenth consecutive market day to yesterday, this time ‘too,’ steeply, by 2.38 per cent (Rs 329.21 million) to Rs 13,505.11 million due to investor preference to invest in risk free, low returns Treasury (T) Bonds and T Bonds rather than lend to the high returns and engine of growth private sector in secondary market trading because of this uncertainty, despite GoSL’s face value (FV) MP debt remaining unchanged at Rs 724,246.88 million, a case for MPBCs too to remain unchanged under perfect conditions.