Advocata Institute CEO Dhananath Fernando says the recent depreciation of the Sri Lankan Rupee against the US Dollar has begun to reverse, with the currency gradually strengthening again since last Thursday.
Speaking on the recent movements in the foreign exchange market, Fernando said many had expected the Dollar to rise further, with some predicting it could even reach Rs. 380 to Rs. 400, but noted that the trend has now shifted.
Fernando explained that the initial depreciation accelerated in early May as the Rupee weakened steadily, prompting exporters to delay converting their Dollars into Rupees in anticipation of better rates.
“When the Rupee keeps depreciating day after day, exporters start thinking they will lose money if they convert their Dollars immediately,” he said.
He noted that by last Thursday, the situation had intensified, with very few exporters bringing Dollars into the market, while importers rushed to secure Dollars fearing further depreciation.
Fernando also pointed to the recent increase in import duties on vehicles as a factor that may have created uncertainty in the market, with some importers assuming authorities were attempting to manage pressure on Dollar reserves.
He said importers had also accelerated opening Letters of Credit (LCs), increasing demand for foreign currency.
According to Fernando, discussions had subsequently taken place between bank dealers and the Central Bank last Thursday evening, including the participation of the Central Bank Governor.
He said market speculation then emerged that authorities could reduce the current 90-day period allowed for exporters to convert export earnings into Rupees, potentially shortening it to 30 days.
“That may have encouraged exporters to quickly convert their Dollars on Friday while rates were still favourable,” Fernando said, adding that it may also have been a strategic move by authorities to encourage Dollar inflows without directly intervening in the market.
Fernando noted that the Central Bank may have been cautious about using reserves aggressively ahead of the upcoming IMF review.
He added that Friday also typically sees higher foreign remittance inflows and relatively lower demand for opening LCs, helping increase Dollar supply in the market.
“As a result, the Rupee appreciated sharply on Friday and has continued to strengthen slightly since then,” he said.
Fernando further said confidence in the market had improved with expectations of IMF-related inflows and growing perceptions that there was no immediate Dollar shortage in the economy. (Newswire)