Rupee expected to dip to Rs.310-320 range later this year: FCR

The Sri Lankan rupee is likely to depreciate in the range of Rs.310-320 against the US dollar in the latter part of the year, First Capital Research (FCR) said. 

This will be driven by the heightened demand for imports and restart of foreign loan repayments upon completion of the External Debt Restructuring (EDR).

The rupee is expected to appreciate up to Rs.295 in the first half of the year, as the higher taxes eat into the rising consumer demand in the short term, amid the escalation in the cost of living.  The indicative rate of the USD/LKR spot exchange rate stood at Rs.300.83 yesterday.

“Slower consumer demand may lead to a reduction in imports, while the peak tourism season in the 1Q 2024 and higher worker remittances could further bolster the LKR. Subsequently, some stabilisation is anticipated as consumer demand improves and tourism income moderates,” FCR said. 

The rupee appreciation also comes in midst the improving tourism earnings and higher remittance inflows. FCR projects tourism earnings to increase by 46.3 percent year-on-year to US $ 3 billion this year. Similarly, the workers’ remittance inflows are projected to rise to US $ 6.6 billion this year, from US $ 6 billion recorded last year.

The notable deceleration seen in consumer-driven imports in the first quarter, due to the front-loading of imports towards the end of last year, was another contributor to the rupee appreciation. 

Further, FCR noted that the Central Bank’s (CB) move to bolster foreign reserves through US dollar purchases has also contributed to the sharp appreciation of the rupee seen so far during the year. FCR expects Sri Lanka to end the year with US $ 6.3 billion in foreign reserves. However, the reserve accumulation is expected to moderate during the latter part of this year, as the government is poised to commence loan repayments, following the conclusion of the EDR process. 

Although bilateral and multilateral inflows are expected in the immediate aftermath, upon completion of the EDR, complimented by a possible sovereign credit upgrade, FCR noted that the anticipated import relaxations and resumption of loan repayments may partly offset the appreciation of the currency in the fourth quarter of the year.

“We expect that the turnaround in the GDP coupled with the relaxation of import restrictions may set the tone for the currency to be on a slower than expected appreciation trend,” FCR stated. Sri Lanka has an annual external debt repayment obligation of nearly US $ 6-7 billion until 2029, which may decline to US $ 3-4 billion in post EDR; hence, the CB is likely to build up its foreign reserve buffer over the coming months, which may exert a downward pressure on the exchange rate.

In May this year, the CB relaxed the cash margin deposit requirements on specific imports. In continuing with this imitative, the government is expected to gradually remove the existing import restrictions, including vehicle imports in the near future, which may potentially exert a downward pressure on the rupee exchange rate.

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