Sri Lanka rupee closes at new low, stocks gain 0.57-pct

ECONOMYNEXT – The Sri Lanka rupee closed at a new low against the US dollar amid inconsistent policy, and stocks gained 0.57 percent despite 546 million rupees of foreign selling in John Keells Holdings, brokers and dealers said.

The rupee weakened further to close at 161.40/45 rupees in two-way quotes against the US dollar in the spot market on foreign outflows mostly government securities, dealers said.

Excess liquidity in Sri Lanka’s money markets rose to almost 58 billion rupees earlier this month which was expected to put pressure on the rupee unless it was permanently sterilized, or followed though with unsterilized sales when the money turns into credit and imports.

The central bank has a habit of buying dollars inflows to the government or private players to expand the money supply through unsterilized peg defense to prevent rupee appreciating.

After halting the appreciation through dollar purchases, the central bank suddenly switches to a floating regime and helps push the rupee down.

Unsterilized Purchases Followed by Float

Some economic analysts who have studied the central bank’s inconsistent policies that has led to permanent currency depreciation calls it the ‘Big No No’.

"The other big danger to the peg is the practice of selling Treasury dollars to the Central Bank," EN’s economic analyst Bellwether wrote last month in a column on how to improve the credibility of Sri Lanka’s permanently downward crawling peg.

"If the guided peg breaks and there is an attempt to float, this is an absolute no-no, even if liquidity is short. All Treasury dollars should be sold in the market for old rupees, not to the Central Bank for new rupees."

The central bank has partially sterilized the liquidity to through term repo deals, which is better than nothing, but the money will eventually flow out and the central bank will not be able to hold on to the rupees, analyss warn,

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Some of the dollar may remain as the falling rupee generates inflation expanding working capital needs of market participants at first in the traded sectors expanding reserve money.

Analysts have advocated policy consistency to improve the credibility of the peg.

Importer demand was subdued during the day and export conversions were also low, they said.

The US dollar closed Tuesday at 161.25/35 rupees.

The Central Bank is now linked to a new portal which allows it to see real time quotes from currency dealers and was seen playing a match-making rule connecting banks with excess US dollars with those that needed it, dealers said.

In the past, the Central Bank intervened via state-names to curtail volatility or used moral suasion on banks to curb their enthusiasm.

Currency dealers said the Central Bank is no longer doing either.

Gilt yields were seen easing in the secondary market for government securities.

Actual trades took place at 161.35 rupees after opening at 161.05/20 rupees, dealers said.

Bond yields edged lower in the secondary market for government securities ahead of the weekly Treasury bill auction on Wednesday.

A five-year bond maturing in 2023 closed unchanged at 9.90/97 percent in two-way quotes. A ten-year bond maturing in 2028 closed at 10.23/33 percent, down from 10.25/40 percent the previous close.

In equities, Colombo’s benchmark All Share index gained 0.57 percent, up 34.44 points to 6,044.67, and the S&P SL20 index of more liquid stocks closed a sharp 0.88 percent higher, up 28.21 points to 3,225.15.

Market turnover was 1.1 billion rupees with 91 stocks gaining during the day and 35 declining. Turnover was 374.8 million rupees the previous day.

Foreign investors sold stocks worth 546 million rupees on Wednesday.

Ceylon Tobacco (up 24.60 rupees to 1,324.60 rupees), John Keells Holdings (up 1.90 rupees to 140 rupees) and Commercial Bank (up 2 rupees to 123 rupees) contributed to the benchmark index gain.

Softlogic Holdings gained 1.10 rupees to 21.70 rupees and Hemas Holdings closed 2 rupees higher at 93 rupees.

Net foreign selling was 590 million rupees, up sharply from selling of 24.3 million rupees on Tuesday. Foreign selling in John Keells Holdings was 546 million rupees, according to Asia Securities.

Crossings, or off-market negotiated trades, amounted to 488.7 million rupees, and were 43 percent of market turnover.

Three crossings in John Keells Holdings amounted to 418.6 million rupees and a crossing each for 42 million rupees in Sampath Bank and 28 million rupees in Commercial Bank.

Sampath Bank closed 1.40 rupees higher at 280.30 rupees. (COLOMBO, 29 August 2018)

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