The present regime has wasted US$ 577.99 million of taxpayers' money in the first five months of the year by fighting a losing battle in trying to prevent the rupee from depreciating due to market forces acting upon it.
The exchange rate (ER), in foreign exchange (FX) market trading, which closed at Rs 137.80 to the US dollar in three months forwards as at 31 May, 2015, has, in the calendar year to 31 May, 2015, has seen its value decline by between Rs 5.60-5.70 or by 4.24-4.31%, having had closed the previous year at Rs 132.10/20 to the dollar in interbank "spot next" trading.
In both of these instances, the ER has been operating under CB's moral suasion diktat, in a losing battle by the CB, to prevent its depreciation. Under "perfect" conditions, the markets trade in "spot," unhindered and untrammelled by the absence of CB's moral suasion diktat
Nevertheless, the ER, as at Friday, 12 June, 2015, has been artificially strengthened to Rs 134 interbank "spot" trading, because of CB once more "actively" intervening in the FX market since the beginning of this month.
This is done by offering dollars to them from its foreign reserves at discounted spot prices. The current depreciating pressure on the rupee is due to foreign exits from the government securities and stock markets due to the political inertia of the present regime particularly on matters economic, coupled with political uncertainty due to a general election pending, market sources told Ceylon FT.
Nevertheless, if the present regime wasted taxpayers' money by fighting a losing battle to save the rupee, the previous regime was no better. They wasted a massive $ 516.9 million in the four month period from September 2014 to December 2014 in trying to salvage the rupee by selling dollars also from CB's foreign reserves at discounted prices to the market.
Nonetheless, the ER, which closed end August 2014 at Rs 130.20/23 to the dollar in 'spot' trading, weakened by between 1.46% and 1.51%, or by Rs 1.90 to Rs 1.97, to close the year at Rs 132.10/20 to the dollar in interbank 'spot next' trading.
The synopsis is that though both regimes wasted US$ 1,094.89 million or US$ 1.1 billion of taxpayers' money in a short space of nine months in trying to prevent the rupee from depreciating, yet, the ER in that review period fell by between 5.81% to 5.84% or by between Rs 7.57-Rs 7.60 to the dollar, having had closed end August 2014 at Rs 130.20/23 in 'spot,' to Rs 137.80 in three months' forwards at end May 2015 in market trading.
The depreciation of the rupee at the tail end of the previous regime was caused by two factors. One was the uncertainty caused due to an impending presidential election and the other, its tinkering of interest rates in its monetary policy review of 23 September, 2014.
In order to spur credit growth, the previous regime created a two tier interest rate regime. That was done by paying banks an overnight interest rate of 6.50% for parking its excess for a maximum of three days per calendar month in its standing deposit facility window (SDFW) and a penal deposit rate of 5% on all other days of the month.
This, i.e. due to an induced low interest rate regime, led to a flight of foreign capital totalling Rs 44,208.73 million
(Rs 44.2 billion) from the government securities market in the four month period to end December 2014, thereby causing further downward pressure on the ER.
The current regime however rationalized the ER regime to one. At present the rate offered by CB's SDFW is a uniformed 6%, while the rate charged as per by its standing lending facility to banks is 7.5%.
Courtesy:Ceylon Financial times 15 June 2015