Strong rupee to push more $ liquidity into the banking system
The domestic currency appreciation will stimulate more foreign exchange leading to additional liquidity in the banking system, analysts say.
A bank CEO said that other than large exporters, other exporters, in general, will actively consider converting their dollars, which will see a larger quantum of foreign currency coming into the country, which in turn will help the dollar liquidity in the banking system. He added the importers will adopt a wait-and-see attitude to find out where the currency will ultimately settle. “For the next month or two, there will not be an import sector pick up in the system. The currency is slated to decline a bit more, moderate, and slightly go up in the next few months.”
A banking sector analyst said that inflation is slated to come down and improve the disposable income of people. Imports will not pick up till interest rates come down to a tolerable level, he said noting that with the ongoing reform process in the country and with the International Monetary Fund (IMF) bailout package, the economy will bounce back.
Senior bankers pointed out that foreign inward remittances’ values will go down. “Exporters will get low value for their exports, another reason they may not send the cash back to the country and will also face a higher cost of productions and their margins are likely to shrink,” a senior banker said.
The currency appreciation in recent weeks is overall a positive development. It will boost the level of confidence in Sri Lanka, in its economy and the currency, Kapila Jayawardena, CEO, LOLC PLC told the Business Times. “Foreigners do not like to invest in countries which have constant currency depreciation as their investments get depleted.” He also noted that there is a lag between cost escalation and inflation for exporters. “We need to understand that the currency was at 203 for a US dollar 18 months ago and now it is at 315 per dollar. So, there has been considerable depreciation anyway.” Noting that the currency appreciation is a definite confidence booster, he said that sustaining this level of the exchange rate is a challenge.
An economist noted that the currency appreciation will see some exporters get the raw end of the deal in the short term.
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