Domestic foreign exchange market expands in 2010

The domestic foreign exchange market expanded in 2010 amidst the mixed impact from the developments in the external sector.

Given the expansion in trade, steady inflows into the domestic foreign exchange market from export proceeds, increased workers' remittance inflows and stability in the exchange rate; the total volume of spot transactions increased around US $ 7,416 million in 2010, compared to US $ 6,335 million recorded in 2009, the Central Bank annual report 2010 said.

However, the total volume of forward transactions has deviated from the trend seen in the spot market with the transaction volume decreasing to US $ 3,649 million during 2010 compared to US $ 4,624 million recorded during 2009.

The relatively stable spot market exchange rates as well as the expectations of steady inflows into the market have reduced the demand for forward booking of foreign exchange requirements.

Accordingly, the total inter-bank foreign exchange transaction volume has increased only marginally to US $ 11,065 million during 2010 from US $ 10,959 million in 2009.

The forward premia for one-month, three-month and six-month remained slightly lower than the interest rate differentials throughout 2010. This indicates the market expectation of continued future inflows into the domestic foreign exchange market in the short-term.

Despite declining domestic interest rates, it being comparatively higher than the international benchmark interest rates has resulted in higher interest rate differentials.

Coupled with the increased investor confidence in the domestic economy, the higher interest rate differential further supplemented attracting foreign investment into the domestic treasury bill and bond market, the report said.