A surge in importer demand saw the spot-next exchange rate move up to around Rs. 134 to a dollar yesterday (26), before easing to close the day at Rs. 133.20/70 as the spot market continues to be illiquid.
Spot market deals, where settlement falls two days later, have virtually dried up due to liquidity constraints and regulatory pressure, currency dealers said. However, the spot-next market , where settlement is three days after, was active.
"We saw some importer demand which pushed the spot-next exchange rate to Rs. 134 to a dollar but it eased thereafter to close at Rs. 133.50," a currency dealer said.
"The supply of dollars is not enough to meet importer requirements, but once their demand eases, the pressure on the exchange rate would relax. The Central Bank is closely following these developments and does not want to seem to do anything as yet," a dealer said.
Thin net open positions imposed by the Central Bank earlier this year to curb speculation, has resulted in volatility.
"Small inflows or outflows can cause the rupee to appreciate or depreciate as we have seen for some time now," another dealer said. "The usual importer demand depreciates the rupee, but when the projected investments and inflows start flowing in, then the rupee would likewise appreciate sharply."
Currency dealers said the Central Bank last Friday used moral suasion to cool off pressure on the exchange rate, which resulted in an inactive spot market on Monday and Tuesday.
The Central Bank and Treasury have said the rupee was expected to stabilise at Rs.125 to a dollar.
Standard Chartered Bank in a recent report said it expected the rupee to appreciate by the third quarter of this year.
The International Monetary Fund earlier this year said a flexible exchange rate would act as ‘shock-absorbers’, helping the country see through tough external pressures.
Treasury Secretary Dr. P. B. Jayasundera said the government was prepared to clamp down on ‘unwarranted speculation’ if and when necessary.
The Central Bank floated the exchange rate as part of a belated policy package to contain a balance of payments crisis. While it was heavily criticised by economists for ignoring the balance of payments crisis for too long, the Central Bank has been praised for its recent policy measures. Even Opposition MP Dr. Harsha De Silva has said as much as reported in these pages.
If the government was faulted for ignoring the problem last year, the opposition can be faulted for doing the same now, analysts point out.
"The authorities have taken decisive steps to rectify the problem but the opposition by attacking the solutions, is ignoring the underlying problem, which is the balance of payments. In other words the opposition wants us to go back to the point where we created a balance of payments crisis," one analyst said.