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Rupee depreciation seen as temporary, say analysts

The depreciation of the rupee against the US dollar is a temporary measure to overcome an immediate crisis affecting exports of garments, tea and rubber, trade sources say.

The Central Bank move which saw the rupee falling to over Rs 110 against the US dollar on Friday from Rs 107-8 three days ago, came after tea producers complained to the government of a selling crisis partly triggered by devaluation of currencies in other tea-buying countries.

Tea sales picked up during the past few days after the Sri Lanka Tea Board – at the request of the government – intervened for the first time in the market and bought close to a million kg of tea worth Rs 231.5 million. Rubber producers, also facing a price slump, heaved a sigh of relief when Indonesia, Thailand and Malaysia agreed during the week to cut output in the hope that price levels would rise.
Sri Lanka Rubber prices have hit a three-year low in the past few weeks because rubber-based industries globally were switching to synthetic rubber from natural rubber as fuel prices (required for synthetic rubber production) were falling sharply.

Global crude oil prices this week fell to a 19-month low of $59 per barrel putting pressure on the Ceylon Petroleum Corporation to go for a price cut just as the opposition prepared a campaign against rising cost-of-living and fuel prices.

Central Bank Governor Ajith Nivard Cabraal said the Bank had decided to allow greater flexibility – for the market to determine the exchange rates – in the rupee exchange rate against the US dollar because many of the currencies of Sri Lanka’s main trading partners had depreciated sharply against the dollar since mid-September.

However, the depreciation move – cheered by exporters here – was tempered with CB-led restrictions on the import of 44 items in a bid to deter any speculation in foreign exchange and a possible outflow of dollars.

While the Tea Board intervention at the recent auction didn’t sharply raise prices and that was not the intention, it helped sell a large quantity of unsold stocks, a tea broker said.

“There has been a large quantity of mostly unsold low growns – about 60 percent of total production – and some of these unsold stocks moved this week,” he said. The Tea Board had purchased 20 percent of the teas on offer at the auction.

“While some may argue that state intervention in the commodities markets is not a good thing, in the context of the present crisis, I think it is a wise move and would be temporary till the markets recover and unsold stocks fall,” he said.

The Central Bank Governor said these intervention measures were temporary to overcome a crisis and could be removed before March in the case of the restrictions on certain imports.

 
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