Colombo Stocks advance

Colombo Stocks advanced amidst a policy decision by the Monetary Authorities to allow a depreciation of the Rupee against the US Dollar. The Rupee has been under pressure in the recent past amidst a worsening external reserve position.

The Central Bank which had been defending the exchange rate at Rs 108.00, today announced that it would allow a limited depreciation of the Rupee, signalling a depreciation of the Rupee was imminent. The Central Bank’s press release did not elaborate on how much of a “limited depreciation” it would allow.

Immediately after the announcement, dealers in private banks were not quoting on USD exchange rates. Later in the morning, a state bank was selling USD at Rs 110. Nonetheless buying pressure had been evident in money markets throughout the day.

The Central Bank statement cited “recent sharp decline in export prices, prospects of lower export demand due to a likelihood of further slowing down in the global economy and the recent sharp appreciation of the US dollar against most major international currencies” as the reason for the policy reversal.

The US Dollars rise against other major currencies was prompted by the on-going credit crisis, which originated in the United States and has since spread to Europe and is also affecting emerging markets.

The credit crisis created a shortage of US Dollars and hence its appreciation vs. most other currencies. A credit crisis reduces consumer demand in countries engulfed by it. As the majority of Sri Lanka’s exports are to the USA and Europe, Sri Lanka’s export revenues can contract unless the currency depreciates sufficiently to maintain its export competitiveness.

Source: First Guardian Equities