The exchange rate (ER) didn't fall below the dubious Rs 141 barrier by 1.55 pm yesterday, being traded at Rs 140.95 to the US dollar in interbank spot trading, unchanged from its previous day's closing price, market sources told Ceylon FT.
"There is apprehension in the market which prevents it from crossing the Rs 141 barrier on the presumption that the Central Bank (CB) will then intervene", they said. Previously, the market faced this trepidation when the ER closed in on the Rs 139 'barrier' and afterwards the
Rs 140 'barrier', before sailing past both, they said.
Fears of CB intervention would mean artificially appreciating the ER to the detriment of sellers seeking a better price for their dollars. Nevertheless, despite this barrier, imaginary or otherwise, demand outweighs supply, sources said. It may be but a matter of time before the ER passes the Rs 141 barrier, they said.
Volumes however were moderate yesterday, sources said. There is neither moral suasion nor CB's defence of the rupee, they added.
All eyes are on what the decision of the Federal Open Market Committee (FOMC) yesterday would be, sources said. The FOMC's decision would be known by the local market only after market opens for trading today, because Colombo is nearly 12 hours ahead of Washington, D.C.
There is a possibility that after yesterday's FOMC meet, the Federal Reserve System after a lapse of nine years will raise its near zero interest rates this month, or, at the latest, before the year end.
Expectations that the Fed. would raise rates has resulted in foreign investors exiting from markets such as Sri Lanka and re-parking their investments in US based assets, thereby causing downward pressure on the rupee. Most investors in the government securities market are US based investors.
Since CB allowed the rupee to float two weeks ago on 4 September due to a steep depreciation of its foreign reserves because of its protection of the rupee at various prices for a year, the ER in a space of 13 days and up to 1.55 pm yesterday, it has depreciated sharply by Rs 6.20 or by 4.6%.
A weak rupee hurts the poor and the fixed wage earner the hardest as Sri Lanka is an import dependent economy. On the other hand, a free float, or in this instance a depreciative rupee due to impressed forces acting upon it, unprotected by CB's intervention, conserves Sri Lanka's foreign reserves and enhances export competitiveness, whilst also helping those who live off remittances to get a better rate for their dollars.
Courtesy: Ceylon Financial Today 18 September 2015