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State Protected Rupee After Two Months

Central Bank of Sri Lanka (CBSL)/state protected the exchange rate (ER) after a lapse of two months at Wednesday’s (January 22) trading, data maintained by this reporter showed.

But this trend was reversed in the two remaining days of trading left last week, ie on Thursday and Friday due to inflows on thin volumes, sources told this reporter.

The ER in interbank spot trading against the US dollar ($) as a result strengthened to the Rs. 130.70/75 level in two way quotes on Thursday on thin trades, as opposed to it closing weaker at the Rs. 130.80/85 level the previous day Wednesday.

On Tuesday (January 21) it had had closed stronger at the Rs. 130.75/85 level.

However, by the close of the week on Friday it had had further strengthened to Rs. 130.65/70 on thin trades, despite the fact that the state was procuring the same at the Rs. 130.65 level, the sources said.

Week on week (WoW) the ER in two way quotes had had gained by Sri Lanka cents (SLc) five/four to Rs. 130.65/70 in two way quotes to the $, having had closed the previous week at the Rs. 130.70/74 level.

A movement of five or 10 SLc of the ER on a particular day is not something to get too worried or too happy, they added.

Meanwhile on Wednesday CBSL began protecting the ER after it fell to the Rs. 130.85 level against the $ in interbank spot trading, the sources said. They then began offering $s at the Rs. 130.85 level, after which the ER closed  Wednesday at Rs. 130.80/85 level in two way quotes, the sources said.

These offerings are made through CBSL’s foreign exchange (FX) reserves.

The ER the previous day Tuesday had closed at the Rs. 130.75/85 level in two way quotes to the $.

With the defence of the ER on Wednesday, exporters began converting their $s, whilst booking forward, as a result of which the premium of  one year forward rates Wednesday over Tuesday fell by 30 Sri Lanka cents (SLc) to  Rs. 4.50, they said.

According to records maintained by this reporter, the last time prior to Wednesday that CBSL had had been in the market to defend the local currency was in the week ended on November 15, 2013 (see The Sunday Leader business pages of November 17, 2013). At that time the ER had had been protected at Rs. 131.10 to the $ in interbank spot trading. This defence coupled with moral suasion compelled trades to be done on “spot next” basis at Rs. 131.25/30 level in two way quotes (see The Sunday Leader business pages of November 24, 2013).

Subsequently the ER in spot trading was allowed to weaken by five SLc to Rs. 131.15 and spot next also by a similar amount to Rs. 131.35, before closing the week ended November 28, 2013 at Rs. 131.15/30 and Rs. 131.30 respectively (see The Sunday Leader business pages of December 1, 2013).

However in the following week CBSL let go of defending the rupee due to inflows, as a result of which the ER closed stronger at the Rs. 130.75/85 level in the week ended December 5, 2013 (see The Sunday Leader business pages of December 8, 2013).

But as events showed, this protection was once more restored seven weeks later on Wednesday, January 22, 2014, only to be removed the following day.

Volumes in the FX market on Wednesday were substantial, the sources said.

At the beginning of the week on Monday, thin trading continued to dominate the FX market with hardly a change over its previous (January 17), with sources telling this reporter that the ER closed Monday at Rs. 130/70 to the $ in interbank spot trading, while the state “continued to keep away from the FX market.”

While some said that it closed the previous day at Rs. 130.70/74 to the $ in two way quotes in spot, others said that it closed at Rs. 130.65/70, somewhat stronger over its Monday’s close of Rs. 130.70.

Contrary to what this reporter said in these columns in last week’s issue of The Sunday Leader, the US$ one billion Sovereign Bond proceeds had had entered in to the Government of Sri Lanka’s (GoSL’s) Treasury’s accounts in the week ended, Friday January 17 and not in the week ended January 24.

However, it’s unlikely that these proceeds would be used to strengthen the rupee as such an action would be detrimental to exporters and may also expedite the exit of foreign funds from the government securities market in order to profit from a rising rupee, but at the expense of once more causing pressure on the rupee due to the exit of FX from the market (see also the lead story on this week’s business pages as well as the business pages in its last week’s issue).

Sri Lanka runs a current account deficit in its balance of payments.

On Tuesday the ER marginally weakened by five SLc to Rs. 130.75/85 to the $ in interbank spot trading on thin volumes, while state owned People’s Bank (PB) which at times acts as an agent of the GoSL was seen buying $s from the market, sources said.

The ER the previous day closed at Rs. 130.70 in interbank spot trading.

Though state buying has been witnessed in the market from time to time, the ER, since the beginning of the new year has largely remained stable at the Rs. 130.70 level, they had then said.

Nevertheless the state at the present may need not procure any $s from the market, at least in substantial quantities as it recently sold a $ one billion Sovereign Bond in international markets. Therefore, the required $s to meet the state’s needs may be procured from the Sovereign Bond issue rather than from the FX market at the present juncture.

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