The government yesterday artificially appreciated the exchange rate (ER) by 20 Sri Lanka cents (SLc) to Rs 133.90 to the US dollar in controlled 'spot' trading, whereas the market was dealing in the longer and more expensive three and six months forwards in order to find price discovery, market sources told Ceylon FT.
As a result, trades in three months forwards were being executed at Rs 135.75 and those of six months at Rs 137.60 to the dollar as at 3.15 pm yesterday. But volumes were thin. The market was not dealing in spot trades among themselves, because for sellers, the spot price of Rs 133.90 was too low.
Nevertheless, dollars were being offered from Central Bank's (CB's) foreign reserves at the controlled spot price of Rs 133.90 yesterday, based on buyers submitting import documents and on banks' net open positions. CB deals in 'spot' in the markets.
CB, this month, has been controlling the 'spot,' within a range of Rs 133.80 and Rs 134.20, so far. At the beginning of the month, when the CB once more began intervening in the market by offering 'dollar discounts,' it first offered dollars at Rs 133.80, before increasing its price to Rs 133.90 to the dollar.
It afterwards once more strengthened it to Rs 133.80, before weakening it to Rs 134 and afterwards, further weakening to Rs 134. 20 on Thursday (18 June). The following day Friday, CB strengthened it to Rs 134.10, before further strengthening it to Rs 133.90 yesterday.
The biggest beneficiaries of such artificial increases in the rupee value are not necessarily importers, but foreign investors exiting from the government securities and stock markets due to the current, unstable political situation prevailing in the country because of a minority and a transitionary government in power.
Courtesy: Ceylon Financial Times 22 June 2015