Rupee appreciation against the dollar is explained by Dhananath Fernando as exporters, importers, LCs, and Central Bank signals shift market pressure.
Rupee appreciation in recent days has raised fresh questions in the market, and economic analyst Dhananath Fernando has explained why the dollar suddenly began weakening again.
Prominent economic analyst and Advocata Institute CEO Dhananath Fernando said the rupee’s movement against the dollar must be understood by first looking at why it depreciated sharply before reversing.
He said the public had seen the dollar rising and the rupee depreciating. However, since last Thursday, that trend had changed.
The rupee has now gradually started appreciating again, meaning the value of the dollar has begun to decline.
Fernando said many people had expected the dollar to move closer to Rs. 380 or even Rs. 400, and he too had believed such a movement was possible.
However, the trend reversed sharply.
He said the key turning point occurred on Thursday night.
According to Fernando, the first step is to understand why the rupee depreciated in the first place and why the sharpest pressure emerged toward the end of Thursday.
He said there were several main reasons behind that movement.
The rupee had already been depreciating for some time, especially since the beginning of May.
From early May, the pace of depreciation increased, with the rupee moving by around two or three rupees at a time.
Fernando said that when this happens, exporters who bring dollars into the market begin to think twice before converting them into rupees.
They begin to believe that if they convert dollars today while the rupee is continuously weakening, they may suffer a loss.
By Thursday night, this situation had intensified.
Even during the previous two days, the rupee had depreciated by around two or three rupees.
As a result, by Thursday, very few exporters were bringing dollars into the market.
At the same time, importers became increasingly nervous after seeing the pace of depreciation.
They began demanding more and more dollars from the market.
Fernando said that a few days earlier, the government had also imposed a 50% surcharge on customs duty for vehicle imports.
In his view, that sent a small signal to the market.
The market interpreted it as a sign that the government was now under pressure and was trying to slow vehicle imports because of dollar shortages.
He said the effect was not limited to vehicles.
Many importers of non-perishable goods were also tempted to stock up as much as possible.
The reason, he explained, was the expectation that prices tomorrow would be higher than prices today.
Fernando said many importers also need to deposit money when opening a Letter of Credit.
However, many of them open LCs by taking loans.
Depending on the guidelines of each bank, an importer may need to deposit around 10%.
For example, he said, if someone opens an LC for US$ 100 and needs to deposit the rupee equivalent, that person may not deposit the full amount from their own funds.
Instead, some may deposit only a portion and borrow the balance from the bank.
Fernando said banks had the ability to lend at that time because there was excess rupee liquidity in the market.
By Thursday, many people had therefore started opening LCs.
That increased demand for dollars and pushed the exchange rate sharply toward the Rs. 353 to Rs. 354 level.
However, by Thursday evening or night, discussions were held between main dealers, banks, and the Central Bank.
Fernando said, to his knowledge, the Central Bank Governor also participated in the discussion.
The key questions were why the situation was happening and what should be done about it.
He said a small but important signal then came to the market.
Currently, exporters who bring dollars into Sri Lanka are required by law to convert those dollars into rupees within 90 days of the export.
For example, if an exporter earns US$ 100 from exporting tea and keeps it in a bank account, that amount must be converted into rupees within 90 days.
Fernando said the market received an indication that this conversion period could be reduced.
That created pressure on exporters because they knew dollars would definitely have to come into the market.
As a result, many exporters were motivated to convert dollars on Friday.
He said the weekend on Saturday and Sunday, combined with a favourable exchange rate, encouraged exporters to act.
Fernando said all parties had acted tactically in this situation.
He added that exporters naturally tend to look at such matters strategically.
The possible reduction of the conversion period to 30 days may also have been a tactical step by the Central Bank Governor or the Central Bank.
Fernando said it is difficult for the Central Bank to use reserves at this moment to bring down the exchange rate.
That is because an IMF review is expected at the end of this week.
Sri Lanka also has reserve targets to maintain, making direct intervention more difficult.
Fernando said Friday had another important feature.
It is generally a day when more foreign remittances enter the market.
It is also a day when fewer LCs are opened.
As a result, a large amount of dollars entered the market on Friday.
Supply increased, while demand decreased.
That created a rapid appreciation of the rupee on Friday.
Although the movement was not as strong later, the rupee also appreciated slightly today.
Fernando said dollars are now coming into the market because people fear that if they continue holding dollars, the rupee may appreciate further and they may suffer losses.
There is also an expectation that IMF money is coming.
He said these developments have created a market atmosphere suggesting that the dollar shortage may not be as severe as feared.
Since last Thursday, the market has received a somewhat positive signal.
Fernando described this as a positive situation.
