Rupee depreciation excessive -CB

The Central Bank has informed the general public that the rupee-dollar exchange rate depreciation in recent time was excessive in terms of the favourable external sector developments recorded during the year.

However, some of the recent media reports have attempted to suggest that the exchange rate has been overvalued and needs further depreciation according to the principle of two country Purchasing Power Parity (PPP) .

A country maintains trading and financing relations with a large number of countries.

The Central Bank computes Real Effective Exchange Rates (REER) with respect to two sets of countries.

Based on the recent trade pattern among major trading partners, the PPP or (REER) has fallen below the 100 mark in 2007, implying that the nominal bilateral exchange rates have already depreciated beyond the parity level.

The behaviour of the exchange rate does not strictly follow the inflation differential. It also responds to the external sector developments.

Recent performance in Sri Lanka points to a healthy development with cumulative exports reaching 15.8 per cent growth and the trade deficit narrowing down to US$ 1,806 million during January to July 2007.

The current account deficit also declined to US$ 478 million during the first half of 2007 from US dollars 786 million in the corresponding period in 2006. These developments are expected to continue throughout 2007.

Hence the Central Bank is of the view that the currency depreciation is in excess of the path that is consistent with strong external sector developments.