Oct 28, 2015 (LBO) -Sri Lanka’s rupee which was floated in September is way over sold and won’t depreciate further, an analyst said.
“The LKR has depreciated quite a bit in last 18 months. The effects may already be visible in your exports. But is it going to depreciate further? I don’t think so,” Akshay Chinchalkar, head of charts and technical analysis for Bloomberg in South Asia told LBO.
“I think close to 142 rupees is where the LKR should find some support. And it should probably pull back below 140 rupees to 138. It is not a good time for you to sell the LKR. I think it is way too over sold.”
Chinchalkar said that if Sri Lanka continued to think that the dollar would rally against the rupee, it could be “a very risky move.”
“Although depreciating LKR will help exports, it also has an adverse impact on imports. It is always a delicate balance. Like I said because the LKR is falling for the last 18 months or so, the good effects on currency depreciation on exports may be visible in Sri Lanka’s exports,” he said.
“But I think now it is time for Sri Lanka to start thinking about imports. Any further depreciation of LKR will create some big problems for imports,” Chinchalkar added.
The rupee was at 141.10/20 on Monday, compared to Friday’s close of 141.05/10.
Dushni Weerakoon, deputy director of Institute of Policy Studies said that the decision to float the rupee had constantly been a stop-gap policy for years of the government.
“Sri Lanka has always tried to stimulate economic growth via monetary policy where monetary easing or a misaligned exchange rate is pushed to the economy,” Weerakoon said.
“What we end up with is consumer demand picking up with imports amplifying, the exchange rate being overvalued and the rupee being pressured, which ultimately leads to inflation.”
“As a result policy corrections are made abruptly, which leads to the rupee floating,” she said.
“The cycle never ends.”
She said the next step of the Government will be further monetary easing.
“If private sector credit financing increases and the rupee continues to depreciate, it’s fair to say that demand side inflation will start to build up in the economy. We may end up with high interest rates or a high inflation regime if the policy adjustments are not taken in time,” she said.
“The point that we are missing is that monetary easing will work only if money supply is a constraint to growth.”
“If the growth of the economy is consumption led, then the demand for investments by the private sector will not yield the expected results.”