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Dollar around Rs. 290 in kerb market

11 Mar 2022

 
  • Central Bank-regulated exchange rate increases to Rs. 260
  • Further rupee depreciation can be expected: Dr. W.A. Wijewardena 
  By Shenal Fernando  According to reports, the black market exchange rate has readjusted to Rs. 290 following the over 28% devaluation of the Sri Lanka rupee during this week subsequent to the decision by the Central Bank of Sri Lanka (CBSL) to float the exchange rate. Yesterday (10), the Sri Lanka rupee had once again depreciated by 13%, according to the Indicative US Dollar SPOT Exchange Rate published by the CBSL, which is the weighted average rate of all actual US dollar/Sri Lankan rupee SPOT transactions executed in the domestic inter-bank foreign exchange market, including the CBSL spot interventions, in the aftermath of the confirmation by CBSL Governor Ajith Nivard Cabraal on Wednesday (9) that the exchange rate has been floated and that there was no Rs. 230 cap on transactions. Accordingly, the buying rate of a US dollar had increased to Rs. 260 and the selling rate of a US dollar had increased to Rs. 250 as per the data published by the CBSL.  Speaking to The Morning Business yesterday, former CBSL Deputy Governor Dr. W.A. Wijewardena stated that he expects the exchange rate to fall further, pointing out that if the Government is serious in its intention to eliminate the burgeoning black market for foreign exchange and encourage people to bring back the US dollars they are holding outside the country through the official channels, then it is essential for the official exchange rate to increase above the black market exchange rate.  According to him, if such a situation is effected, then forex inflows will gradually increase and the exchange rate will start to decrease.  “We did the same thing back in 2000 when I was the Deputy Governor of the CBSL. We floated the currency completely. The rate at the time was Rs. 72 per US dollar but it fell to Rs. 95 immediately. Within about two to three weeks, the foreign exchange started coming back to Sri Lanka and the rate settled at about Rs. 85 per US dollar. The same thing will happen now. We have to let the rate fall to around Rs. 275 per US dollar and then the people will start bringing back the foreign exchange they are holding outside and the remittances that are currently being channeled through the unofficial market will come back to the market. Thereafter, there will be foreign exchange in the banking system; as a result the rupee will start appreciating and it will settle around Rs. 255-265,” stated Dr. Wijewardena.      On Monday (7), the CBSL appeared to admit defeat in its strategy of fixing the exchange rate at Rs. 200-203 and announced that greater flexibility in the exchange rate will be allowed to the markets with immediate effect. However, in the same press release, the CBSL stated that it is of the view that forex transactions would take place at levels which are not more than Rs. 230 per US dollar.  This created confusion in the market as to whether the Sri Lankan rupee is truly free floated or whether it was once again pegged at Rs. 230. Therefore on Tuesday (8) and Wednesday the currency depreciation was limited to only 13.3%.  However, on Wednesday evening, the Governor of the CBSL admitted that the currency is fully floated. Therefore, in the aftermath licensed commercial banks had on Wednesday further devalued the Sri Lankan rupee as set out above. Consequently, following this development, the Sri Lankan rupee has depreciated by a total of 28.1% during the week.     Prior to the devaluation of the Sri Lankan rupee this week, the black market was quoting an exchange rate of around Rs. 260-270, while the CBSL was holding the rate at Rs. 203.


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