Comparison of December data 2007 to 2008

By Devan Daniel

* Exchange rate with other currencies determined by global rates against dollar

The rupee has weakened against the dollar, the generally accepted base currency of Sri Lanka, shows a comparison of year-end average rupee/dollar exchange rates presented by the Central Bank for the period 2007-2009. Currently the dollar is trading in the 114 range against the rupee.

Against the US dollar, the rupee depreciated by 2.6 percent to an average of 114.34 in December 2009 from 111.38 in December 2008 which was a depreciation of 2.1 percent from an average of 109.07 in December 2007, the Central Bank’s monthly economic indicators for December 2009 showed.

However against other major currencies, the rupee’s behaviour seems contrasting.

The rupee depreciated by 10.5 percent against the sterling pound to an average of 185.70 in December 2009 from 166.21 in December 2008 while depreciating against the euro by 9.8 percent to 167.02 from 150.68. During this period the rupee depreciated against the yen and Indian rupee by 4.2 percent and 6.2 percent respectively.

The depreciation of the rupee against other currencies as seen when the periods of December 2008 and December 2009 are compared is in stark contrast with exchange rates in a comparison of December 2007 and December 2008 rates.

Average exchange rates against major currencies appreciated form December 2007 to December 2008, except against the US dollar where the rupee depreciated by 2.1 percent to 111.38 from 109.07 and the yen, depreciating 20.4 percent.

The rupee appreciated against the sterling pound by 32.7 percent to 116.21 from 220.58 and appreciated 5.5 percent against the euro to 150.68 from 158.97. It appreciated by 20.4 percent against the Indian rupee as well.

Dealers said the reason for this had much to do with how the dollar was traded against the other currencies in international markets.

“In 2008, the dollar was hit by international speculators as world commodity prices increased and during the onset of the global financial crisis. In international markets, exchange rates are driven purely by market forces and therefore the dollar is traded based on sentiments and sometimes irrational behaviour does take place.

“The movement of other trading currencies against the rupee is purely determined on how the dollar is trading against these currencies in the international market.

“Our base currency is dollars and other currencies are also usually quoted in terms of dollars,” a dealer said.

Dealers said Central Bank intervention in the domestic market to manipulate the exchange rate against the dollar did not really have much of an effect on how the rupee behaved against other trading currencies.

“We have experienced contrasting policy on exchange rate management form December 2007 to December 2008 and December 2008 and 2009. In the first instance, the rupee was prevented from depreciating with the Central Bank selling dollars to prop up the rupee. This was crucial because during the height of the war we needed a stronger exchange rate to buy bullets more cheaply,” a dealer said.

“Of course our reserves took a severe hit and exporters suffered and their problems became compounded with the onset of the global financial crisis by the fourth quarter of 2008. But since the end of the war in May 2009, the exchange rate policy was quite different.

“As foreign investors began to be more interested in Sri Lankan equities and government securities with the war over, there was an increase in foreign currency inflows and the rupee was under pressure to appreciate. This time the Central Bank intervened, buying dollars from the market to prevent a sharp appreciation of the rupee,” he said.

He said this was done to serve two purposes; one, to prevent exporters from being hit by a stronger rupee against major trading currencies and two, by buying dollars official reserves were given a boost.

“Reserves which had gone below US$ 1 billion began to improve even before the IMF approved the US$ 2.6 billion standby facility for balance of payments support.”

“So, while there was heavy intervention in the rupee to dollar front, this did not affect how other trading currencies behaved against the rupee. The exchange rates between the rupee and the other currencies had nothing to do with the Central Bank but how they traded against the dollar in international markets,” a dealer said.