US$/LKR exchange rate likely to remain at 300-325 range in the near-term: StanChart

The US dollar-rupee exchange is likely to remain at Rs.300-325 range in the very near term, while up to US$ 1 billion inflows are expected into the country’s foreign exchange reverses over the next six-month period following the approval of the US$ 2.9 billion bailout package by the Executive Board of the International Monetary Fund (IMF), according to Standard Chartered Bank (StanChart).

“… the Central Bank has announced steps towards a more flexible exchange rate – widening the trading band initially and, more recently, allowing the LKR to be fully market-driven from this week.

 We think this will lead to a further strengthening of the LKR in the near term and a pick-up in FX volatility overall. 

The Central Bank will likely continue to add to its FX reserves given the improvement in US$ supply, and rightly so. We see downside risk to our US$-LKR forecast of 350 by June 2023, and see risks of the exchange rate trading in a 300-325 range in the very near term,” StanChart said in its latest research report on Sri Lanka.

It noted that rupee appreciated by around 7 percent over the past week, driven by a combination of a temporary mismatch in US$ demand-supply onshore and policy steps aimed at a more flexible exchange rate.

When it comes to foreign exchange reserves, StanChart expects US$ 700- US$1 billion inflows over the next six-month period following the Executive Board approval of the US$ 2.9 billion rescue package.

“FX reserves stood at US$ 2.1bn as of January (including the US$ 1.4bn People’s Bank of China swap line, which has conditions regarding usability) and we expect around US$ 700mn - US$ 1bn of inflows in the next six months following IMF board approval,” the report said.

Meanwhile, StandChart forecasts a further 100 basis point increase in policy rates, if inflation targets fall short of the Central Bank’s projections.

“We revise our policy rate forecasts and expect a further 100bps hike, taking the SLFR to 17.5 percent by end-2023 (versus 15.5 percent prior). The risk of further rate hikes cannot be ruled out if inflation moderates at a slower pace, given the pre-agreement between the government and the IMF,” it noted.