As a result the exchange rate (ER) was being quoted at the Rs. 133.50/133.70 level in two way quotes in interbank trading towards the end of the day on Friday as opposed to Rs. 133.80/134.10 to the US dollar ($) the previous day Thursday.
“Volumes may have had been as low as $ 10 million,” he said. An absence of import demand was also noticeable in the market, the source said. However it’s difficult to predict whether the rupee is now in an upward trend, he added.
As a possible pointer to this unpredictability, on Friday, the market’s excess liquidity contracted sharply by Rs. 11,068 million to Rs. 8,058 million (over that of the previous day Thursday’s figure of Rs. 19,126 million), possibly due to Government of Sri Lanka’s (GoSL’s) foreign debt service commitments, where it buys $s from state controlled Central Bank of Sri Lanka (CBSL) in exchange for rupees to service such dues.
Probably as a result, call money’s weighted average rate (WAR) increased by six basis points (bps) to 9.39%, overnight (o/n) market repurchase transactions by seven bps to 9.45% and the weighted average yield ( WAY) in the o/n repo auction by two bps to 9.28% on Friday over that of the previous day’s figures. Current inflation data released by the state controlled Statistics Department also don’t help the situation at least as far as relieving pressure on rates are concerned. Those statistics showed that the point to point change in inflation last month increased by 2.3 percentage points over the previous month to 9.3%. Theoretically high rates should dampen pressure on the ER.
Meanwhile IMF team leader for Sri Lanka Dr. John Nelmes speaking to reporters recently, said that he expected inflation to end at the 9.5% level by the year end, brought about by the actions of high energy prices and a depressed ER (see The Sunday Leader Economy page of 17.6.12.).
However a financial analyst attached to a stockbroking firm told this newspaper that inflation will hit double digits due to the impact of various price increases before tapering off in another six months time (See the business pages of The Sunday Leader of 10.6.12.).
However that may be, on Thursday, the state defended the local currency for a time at the Rs. 133.70 level against the greenback before letting it go, which resulted in its further collapse to the Rs. 133.80/134.10 level in two way quotes at the end of the day’s trading on that day, a source said.
On the previous day Wednesday, an alleged Foreign Ministry report which said that a Japanese fund will invest $ 125 million within the next year in government securities proved no relief to the battered rupee which was quoted within a wide range of between Rs. 133-134 in spot, interbank trading on Wednesday, another source said.
Generally such wide spreads are associated with increased volatility in the market.
“The market has had heard similar stories of inflows before, but now they don’t buy that line,” he said. What the market needs is tangible inflows to support such stories, the source said. The Foreign Ministry report had also allegedly said that this fund would make its first investment totalling $ 1.5 million by July 15.
There were similar such good news earlier last week as well, but those too were insufficient to provide succour to the battered local currency.
Those included an announcement by CBSL of a successful $ 229 million GoSL Bond sale on Monday (June 25) and a report by a foreign bank and published in the local media (not The Sunday Leader) that the weak rupee will strengthen, beginning from this quarter.
Despite these positive reports, the ER which went past the Rs. 133 barrier last Friday (June 22) continued to remain there till the weekend, ie for a period of six consecutive market days since, and inclusive of June 22. Previously, on three occasions, CBSL intervened in the market when the ER crossed the Rs. 133 barrier to shore up the rupee, but this time its limited interference was conspicuous.
The triumvirate comprising President Mahinda Rajapaksa, CBSL Governor Ajith Nivard Cabraal and Treasury Secretary Dr. P.B. Jayasundera have had even been reported to have had said that the ER should strengthen to the Rs. 125 level or below, but this has not taken place thus far.
Meanwhile the opposition has said that the ER will settle at the Rs. 140 level. “That will be disastrous,” the source said. A weak ER will make virtually everything, from energy to bread to medicines to milk powder more expensive to the Sri Lankan consumer as the island is an import dependent economy, having to import such items to meet its daily needs.
GoSL has had even instituted certain policy measures to curb imports in order to protect the rupee. Those included raising vehicle import taxes, limiting credit growth to 18% (it grew by 34.5% last year), raising policy rates and energy prices and also increasing a host of other administered prices such as milk powder, cement, bread and bus fares as well.
But on the flip side, exports have had not been growing due to the euro zone crisis, with the EU being Sri Lanka’s biggest export market, thereby virtually negating the policy measures taken to obviate import growth in order to make a turnaround in the negative trade and current account balances.
At the beginning of last week, ie on Monday, the ER further weakened by Rs. 0.80/0.80 in two way quotes over the previous market day (June 22) close to finish Monday at Rs.133.50/133.90 to the $ in spot, interbank trading, a source said, with those levels virtually remaining unchanged the following day Tuesday and also on Wednesday, before declining further on Thursday, whilst making a slight recovery by the weekend.
“Monday’s weakening of the ER may possibly have had been due to import pressure, though my bank did not witness such a demand,” the source added. The source further said that the ER on Monday morning opened at the Rs. 133.00/133.50 levels in two way quotes, with state owned People’s Bank (PB) and Bank of Ceylon (BoC) having had been there to defend the ER within the Rs. 132.90-133.10 range in spot sales.
“But they didn’t continue with this exercise, they were there only on Monday morning, after which they withdrew later during the day,” the source said. PB and BoC generally act as CBSL’s/GoSL’s agents in the foreign exchange (forex) market.
“They were there to test the waters,” another source said. The supply of $s at discounted rates were not sustainable, he said. The state doesn’t have a vast reservoir of forex to defend the rupee, the source added.
Meanwhile by the week ended June 22, the ER had had weakened by around Rs. 1.50 (1.1%) week on week , having had closed the previous week, ie the week ended June 15 at the Rs. 131.20/131.60 levels in two way quotes. On Friday, June 22, the ER closed at Rs. 132.70/133.10 to the $ in two way quotes, giving an indication that week on week (WoW) it had had weakened by Rs. 1.50/1.50 in two way quotes.
Since the ER was provided with space to manoeuvre on February 9 by CBSL, it has had weakened by Rs. 19.30 (16.9%) to date. Prior to the ER being provided with flexibility on that day, CBSL was defending the same at the Rs. 114.30 price to the $ in spot, interbank trading.
And WoW it has had weakened by Rs. 1.05 (0.8%) as at Friday (June 29).
In other developments, the money market witnessed inflows in the first two days of trading last week which resulted in it being in excess by Rs. 7,576 million on Monday and by Rs. 10, 875 million the following day Tuesday. Excess liquidity was slightly lower at Rs. 10,474 million on Wednesday* (June 27), before almost doubling to the Rs. 19,126 million level the following day Thursday.
This saw call money rates’ WAR and that of the WAR of gilt edged Treasury (T) Bill backed o/n market repurchase transactions contract by 31bps and 30bps to 10.33% and 9.38% respectively by Thursday, over that of the June 22 close.
However, both of these rates, Thursday over Wednesday, increased by eight and one bp respectively, despite increased liquidity levels, Thursday over Wednesday. This is because liquidity demand by one or a few banks is sufficient to drive rates up, a source said.
CBSL also held repo auctions on those days to drain out market’s excess liquidity, taking out Rs. 4,464 million at a WAY of 9.14% on Monday, Rs. 9,019 million at a WAY of 9.13% the following day Tuesday, Rs. 6,610 million at a WAY of 9.22% on Wednesday and Rs. 13,820 million at a WAY of 9.26% on Thursday, while the balance was drained out from its repo window (7.75% o/n rate) on all five of those days, ie inclusive of Friday as well.
“However, three days of inflows is not enough to relieve pressure on the rupee, where the ER had virtually remained stagnant on Tuesday over that of the previous day’s close (after falling on Monday), at Rs. 133.50 to the $ at which price trades were executed on thin volumes and remained unchanged on Wednesday as well, before once more falling on Thursday,” he said.
And on Friday, the market’s excess liquidity contracted sharply to Rs. 8058 million, possibly due to GoSL’s foreign debt service commitments, where it buys $s from CBSL in exchange for rupees. Probably as a result, call money’s WAR increased by six bps to 9.39%, o/n market repurchase transactions by seven bps to 9.45% and the WAY in the o/n repo auction by two bps to 9.28%.
Meanwhile Wednesday’s weekly T Bill auction saw the WAYs for 91, 182 and 364 day tenures creep up by eight, 14 and 10 bps to 11.12%, 12.61% and 12.88% respectively, aided by inflationary pressure and CBSL’s high stock of T Bill holdings, some over Rs. 200 billion, impacting on the economy.
The stock market registered its second lowest turnover for last month, recording Rs. 218.7 million on Friday, coupled with a low net foreign inflow (NFI) figure of Rs. 7.15 million on a lowly Rs. 30.24 million gross inflow figure.
The benchmark ASI marginally gained by 9.86 points (0.2%), while the more sensitive MPI fell by 2.61 points (0.06%) over the previous day to finish the week at 4,965.77 and 4,383.20 points respectively.
WoW these indices have had fallen by 73.38 points (1.5%) and 95.31 points (2.1%) respectively.
But at the beginning of last week, the bourse boosted by internal transfers of shares within companies controlled by business magnate Don Harold Stassen Jayawardena in the first two days of trading last week dominated the market, “ otherwise there was nothing much to shout about,” a source said.
Those internal trades included the transfer of some Rs. seven billion worth of shares of Aitken Spence from Distilleries Company Sri Lanka plc to Melstacorp that took turnover to Rs. 8.1 billion on Tuesday (June 26). An almost similar transfer (though not in volume and value terms) the previous day Monday (June 25) took turnover to Rs. 1.5 billion.
In other developments, foreign buying in JKH and Lion Brewery controlled by the Selvanathan brothers Mano and Hari, resulted in a NFI of Rs. 685.91 million to the market on Tuesday.
However that may be, the ASI and the MPI had had declined by 1% each (49.16 and 42.96 points) to 4,989.99 and 4,435.55 respectively as at Tuesday over that of the previous Friday’s (June 22) closing figures, while gaining by 15.70 points (0.11%) on the ASI, whereas the MPI marginally contracted by 1.59 points (0.04%) the following day Wednesday (June 27) to close at 4,995.69 and 4,433.96 respectively over that of the previous day Tuesday’s close, which day also saw a marginal NFI of Rs. 8.61 million on a Rs. 972.5 million turnover.
On Thursday it was bad, while returning a Rs. 199.63 million net foreign outflow, the respective market indices fell by 39.78 points (0.8%) and 48.15 points (1.09%) to close Thursday at 4,995.91 points and 4,385.81 points on a Rs. 797.2 million turnover.
*It’s unlikely that the market received fresh inflows on Wednesday, because excess liquidity slightly weakened on Wednesday over that of Tuesday’s numbers, compared to the gains made on Tuesday over that of the previous day Monday.