Recent rupee depreciation aligned with capital outflows not current account

Jan 08, 2019 (LBO) – Sri Lanka’s Central Bank Governor says that the rupee depreciation is no longer aligned with fundamentals in terms of current account flows and it is now being driven by capital outflows from the government securities market.
Governor Indrajit Coomaraswamy recently revealed that foreigners who held about two billion US dollars worth of rupee denominate government securities have now brought it down to just nine hundred million dollars.
“That money has had to be fed through the market and that has created a lot of pressure in a thin market of somewhere between sixty to hundred million a day,” he said.

“If 10 or 20 million of government securities money flows out it clearly creates an imbalance between supply and demand in the market.”

Coomaraswamy says that they had to intervene in the foreign exchange market as they think the current depreciation of the currency is a disorderly depreciation.

“The currency has depreciated almost sixteen percent and the real effective exchange rate is well below hundred, so it is now undervalued,” he said.
“So there is no justification for the central bank to prevent what we think now is a disorderly depreciation of the currency, so we have to intervene.
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Governor Coomaraswamy said that they also had to take a remedial action last year to reduce current account outflows. Gold imports, vehicle imports, and oil imports are the main sources that affected current account outflows.
“So those three main sources of instability in the current account have been looked after but now what we need to do is change sentiment,” he said.

According to the Governor, people need change sentiment at three levels. Importers need confidence not to accelerate imports, exporters need to start converting export proceeds or at least convert in a more timely basis and thirdly the holders of gov securities needs to have greater confidence to hold their money.

“Now it’s a matter of confidence in terms of the way we are managing the economy both on the fiscal and monetary side.
We are very confident that on all those fronts going forward with the support of the government we can do what is necessary.
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