Financial Times

Mixed blessings from weaker rupee
The rapid depreciation of the rupee against the dollar is likely to have a mixed impact on the economy, making life easier for exporters in the short term but stoking inflation and raising production costs that could eventually wipe out the benefits of a weaker currency.

Foreign exchange dealers said the rupee was under pressure owing to the uncertainty and bearish sentiment after parliament was dissolved. The rupee had fallen to 99 to the dollar - an almost two percent depreciation since the beginning of the year. Demand for dollars is also high at this time of year as importers cover their requirements ahead of the April new year festival season, economists said. "The uncertainty that is prevalent because of the elections is reflected in the currency movement," said Dr Dushni Weerakoon, an economist at the Institute of Policy Studies.

Dealers said there was a shortage of dollars at a time when demand had increased sharply. The uncertainty caused by the political problems had temporarily slowed foreign direct and portfolio investments, said Dula Weeratunga, assistant general manager (treasury) at Commercial Bank. "There's huge demand coming in," Weeratunga said. "When the dollar started going up all importers started covering spot and forward."

While exports of Ceylon tea are likely to benefit from a weaker rupee in the short term, the subsequent increase in production costs could wipe out this benefit. "The depreciation makes life a little bit better for exporters in the short term but our worry is that if the slide is too high, then it becomes a problem. Then all other costs tend to go up," said Ashroff Omar of Brandix Apparels and head of the Joint Apparel Association Forum, the industry's apex body.

Dealers also said another reason for the shortage of dollars is that exporters are holding on to their earnings. "Whatever little we have from export proceeds, exporters are holding back," said a dealer in a private bank said.

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