October 17, 2006 (LBO) The rupee sank to a new low Tuesday, falling to 107.65 against the dollar in early morning trade, dealers said. The rupee had also been heavily overvalued with the Real Effective Exchange Rate moving close to 110 percent after the rupee appreciated with tsunami aid flows despite high domestic inflation.
Analysts say the latest fall is a long-overdue correction needed to improve the export competitiveness of the rupee.
Dealers also say there is heavy import demand during these months ahead of the December festive season for domestic consumption as well as for export production.
The recent falls in the rupee has come despite falling oil prices.
Though oil prices have come down, pressure on the rupee is primarily coming from expansionary financing of the deficit.
The rupee has moved down sharply during the last two weeks as central bank stayed in the sidelines, protecting its reserves, after intervening heavily during the third quarter.
The rupee has been under pressure since the second quarter of 2006, as central bank financing of the budget deficit increased. The rupee opened at 106.95 but rapidly fell back.
Colombo stocks also opened weaker, down 5 points as an upsurge in violence in the north and east made markets jittery.