CB seen keeping policy rates steady despite pressure on rupee

(Colombo) REUTERS: Sri Lanka’s Central Bank is expected to leave its key interest rates steady yesterday, a Reuters poll showed, despite heavy pressure on the rupee from a political crisis that triggered foreign outflows from stocks and government bonds.  

President Maithripala Sirisena was forced to reinstate Ranil Wickremesinghe as Prime Minister 51 days after sacking him, as his preferred PM, pro-China former president Mahinda Rajapaksa, failed to secure a parliamentary majority. 

An uneasy truce between Wickremesinghe and Sirisena could undermine economic policies, analysts say. 

All analysts expect the Central Bank of Sri Lanka (CBSL) to leave key rates steady as Wickremesinghe’s government aims to focus on economic growth, which has been sluggish due to tight policies, ahead of a presidential poll next year and general election in 2020. 

All 10 economists surveyed expected the Central Bank to keep both its standing deposit facility rate (SDFR) and standing lending facility rate (SLFR) to be left at 8.00 percent and 9.00 percent, respectively. 

The Central Bank raised SDFR by 75 bps and SLFR by 50 bps last month, while reduced the statutory reserve ratio (SRR) by 150 bps to 6.00 percent. All 10 analysts saw the SRR remaining steady. 

Sirisena’s abrupt change of prime minister and his decision to dissolve parliament, which was later ruled unconstitutional, created panic and uncertainty among investors. 

The Sri Lankan rupee hit a fresh low of 181.85 per dollar yesterday while the island-nation’s dollar bonds have also plummeted as foreign investors sell their holdings. The rupee has fallen nearly 5 percent since the political crisis started on October 26. It has dropped 18.4 percent so far this year.

“Political pressure would be against increasing the rates,” said Softlogic Capital Markets CEO Danushka Samarasinghe. 

“However, if rates are increased, it will be better for safeguarding foreign investments in the bond market and also might be favourable from a fiscal point of view.” 

Foreign investors have sold a net Rs.13.7 billion worth of stocks since the political crisis began and about Rs.56.7 billion worth of bonds between October 25 and December 19, bourse and the Central Bank data showed. 

Sri Lanka has seen net outflows of Rs.149 billion from government bonds so far this year, the Central Bank data showed.

Rupee hits record low of 181.85 vs dollar

(Colombo) REUTERS: The Sri Lankan rupee fell to another record low against the dollar yesterday, amid pressure due to capital outflows as uncertainty rooted in a political crisis continued to hurt sentiment.

The rupee hit 181.85 against the U.S. dollar, according to market sources, surpassing its December 24 low of 181.67 to the dollar.

The island nation was plunged into crisis in October after President Maithripala Sirisena replaced Prime Minister Ranil Wickremesinghe with former president Mahinda Rajapaksa, without the backing of parliament, leading to protests and downgrades of Sri Lanka’s debt.

Wickremesinghe was reinstated as prime minister last week, but uncertainty due to the 51-day political crisis continued and dented sentiment
The rupee has weakened about 4.8 percent since the political crisis began. It dropped 1.8 percent in November, and has lost 18.5 percent this year.