Currency depreciation good but too late
This week’s exchange rate depreciation is a good move, but it has been a long time coming and will not make much difference to certain ground realities, analysts say.
“The decision to float the exchange rate is a good one but it is too late. The black economy has grown due to delaying this most crucial decision,” an economist told the Business Times.
The rupee was trading at approximately Rs.260 per USD on Friday with offers for Rs.270-290.There was chaos in the markets this week after the Central Bank floated the rupee (More details in the Kussi Amma Sera column on Page 2).
By floating the rupee, stocks with dollar income and dollar assets will be in high demand considering the attractive valuations, a stock analyst said. Stockbrokers welcomed the move saying it provided investors protection against the rupee depreciation. Dollar income companies will report about 30 per cent higher earnings due to the devaluation while companies with dollar assets will record higher earnings and higher net asset values.
The Monetary Board increased interest rates 50 bps on January 20 and 100 bps on March 4. 2022. “Even though the interest rates have increased by 150 bps in 2022 inflation has increased at a faster pace by 300 bps. Inflation is expected to increase even more considering the high oil prices and the floating of the exchange rate,” a second stock market analyst said.
He also said they expect investors to continue to move money from maturing fixed deposits to the Colombo Stock Exchange.
A second economist pointed out that with the depreciation energy costs will go up which will further increase inflation. “All imports will cost more. There will be an increased flow in foreign exchange but the cost of living, production, interest rate, and the inflation all will rise.” However, exports and USD investment will increase, and we become more competitive in international markets.
“However, we need to wait and see if this will be enough to get the remittances to the mainstream,” he said.
A banker said that depreciating the currency is seen as mostly positive. “Generally, the Net interest margin increases in a rising interest rate scenario.’
Treasury bills are yielding over 9 per cent, some commercial papers at 12.5 per cent, and 5-year debenture over 15 per cent. “With such high-interest rates, going forward further policy rate hikes are on the cards and fixed income securities will become increasingly more attractive asset class,” a second banker said.
Adding to this, the rising interest rates will increase finance costs and the increasing commodity prices stemming from the Ukraine invasion will cause margin deterioration in corporates, he noted.
Meanwhile the Civil Aviation Authority announced a 27 per cent increase in air tickets. Lanka IOC increased fuel prices on Thursday while Ceypetco has also hinted at an increase.
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