foreign reserves have bled by nearly US$ one billion due to its defence of the rupee in the past eight

Reserves depletion moves closer to US$1B mark - ER down Rs 5.05 since end Aug. '14

Ceylon Finance Today: Central Bank's (CB's) foreign reserves have bled by nearly US$ one billion due to its defence of the rupee in the past eight months to April, 2015, statistics showed.

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Ceylontoday, 2015-05-18 02:05:00

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Reserves depletion moves closer to US$1B mark - ER down Rs 5.05 since end Aug. '14

By Paneetha Amereseker

Ceylon Finance Today: Central Bank's (CB's) foreign reserves have bled by nearly US$ one billion due to its defence of the rupee in the past eight months to April, 2015, statistics showed.
As a result, US$ 824.51 million of taxpayers' money have been expended from CB's reserves during this period.
Further, on account of these actions, CB's foreign reserves, which were on a near peak of US$ 9,185.64 million as at end August 2014, has since declined by US$ 1,752.65 million or by 19.1% to 7,432.99 million during the review period. This is notwithstanding the fact that the country's foreign reserves received a boost of US$ 400 million last month (April) due to a swap arrangement with the Reserve Bank of India (RBI).
The difference, ie US$ 928.14 million would have had been swallowed up to meet the government's foreign debt servicing commitments.

Meanwhile, the public is unaware of the details of this swap arrangement, such as the interest charged by RBI and by when this 'swap' needs to be repaid.
Nonetheless, despite the continuous drain in taxpayers' money by CB on account of trying to defend the rupee, the exchange rate (ER) since end August 2014 to date (Friday, 15 May, 2015),ie in a period of 37 weeks, has declined by a massive Rs 5.05 or by 3.9%, to be trading in the market currently on one month's forwards at Rs 135.25 to the US dollar, though trading volumes are thin.

At end August 2014 the ER had closed at Rs 130.20 at 'spot.'
Due to a dearth in inflows, banks since end August 2014 have been operating under CB's moral suasion diktat, thereby compelling them to do trades in other tenures other than the standard spot, in order to get a better deal for their dollars. The current administered "spot" price is Rs 133.30, a Rs 3.10 or 3.4% depreciation over its "spot" price of Rs 130.20 as at end August, 2014.
Depreciating pressure on the rupee is caused due to Sri Lanka running a current account deficit on the balance of payments, aided by a negative trade balance. Intense pressure by CB to defend the rupee in the review period were due to two reasons: The first, due to a presidential election now passed and the other, because of a looming general election which has to be held at the latest by next year when the life of the current parliament lapses, but with reports saying that it may be held earlier, due to an expected premature dissolution of parliament by the president using his executive powers.

A depreciated rupee would make essential imports such as rice, sugar, dhal, milk food, wheat grain and pharmaceuticals more expensive to the consumer. Such essentials, increasing in price, would make an incumbent government unpopular at an election. Hence, the attempt to control depreciating pressure on the rupee by selling dollars at discounted "spot" prices to the market by a politicised CB from its foreign reserves, despite the fact that these are taxpayers' money.
CB's dealings with the market are on "spot."

Further, a weakened rupee would also make the government's foreign debt servicing costs more expensive as it needs to meet such commitments by buying the required dollars from CB's foreign reserves after paying the equivalent in rupees.
Government's foreign debt servicing commitments in the 12 months to end March 2016 are estimated to be $ 6,237.11 million, according to latest statistics. Of this sum, $ 1,165.81 million will have to be met in May and June of this year. CB sells the required dollars to the Government to meet such commitments at "spot" prices.