Sri Lankan rupee will face intermittent bout of depreciation pressure during 2014, as and when global risk aversion increases, says Deutsche bank in a new study conducted to assess the risks to the rupee.
The Bank says, it is plausible for the rupee to test its all-time lows (134 vs the USD) if the Emerging Market currency turmoil gains momentum and persists for a longer period.
“Even if the EM currency turmoil abates in the next few weeks, there could be pressure on the Sri Lankan rupee, due to the Fed’s tapering actions,” added Deutsche on its new report.
However, the Bank says risk of a large, disorderly depreciation of the rupee (as was seen in 2012) remains low in the near-term, given that the BOP dynamic remains positive for the current year.
It also says this will also be coupled to the fact that the Sri Lankan rupee has already depreciated 15% since 2012.
“We think rupee will remain range bound in 2014, with 130 likely to be the floor,” it added.
Starting from 2012, the Sri Lankan rupee has depreciated by 15% till date, which is comparable to the currency trend of the other South-Asian current account deficit countries such as India (-14.9%) and Pakistan (-14.7%) during the comparable period.
“So bulk of the currency adjustment has also occurred in Sri Lanka’s case, which reduces the risk of a disorderly depreciation of the rupee in the immediate near term”, adds the bank
“It is unlikely that the rupee will go for a free fall, as was seen in 2012, in light of the ongoing improvement on the macro front” it points out.
The Deutsche bank says the trade deficit, current account deficit, credit growth, inflation and FX reserves of the country has improved.
“Bulk of the adjustment has already occurred on the currency front,” announced the Bank.
The Bank says, it is plausible for the rupee to test its all-time lows (134 vs the USD) if the Emerging Market currency turmoil gains momentum and persists for a longer period.
“Even if the EM currency turmoil abates in the next few weeks, there could be pressure on the Sri Lankan rupee, due to the Fed’s tapering actions,” added Deutsche on its new report.
However, the Bank says risk of a large, disorderly depreciation of the rupee (as was seen in 2012) remains low in the near-term, given that the BOP dynamic remains positive for the current year.
It also says this will also be coupled to the fact that the Sri Lankan rupee has already depreciated 15% since 2012.
“We think rupee will remain range bound in 2014, with 130 likely to be the floor,” it added.
Starting from 2012, the Sri Lankan rupee has depreciated by 15% till date, which is comparable to the currency trend of the other South-Asian current account deficit countries such as India (-14.9%) and Pakistan (-14.7%) during the comparable period.
“So bulk of the currency adjustment has also occurred in Sri Lanka’s case, which reduces the risk of a disorderly depreciation of the rupee in the immediate near term”, adds the bank
“It is unlikely that the rupee will go for a free fall, as was seen in 2012, in light of the ongoing improvement on the macro front” it points out.
The Deutsche bank says the trade deficit, current account deficit, credit growth, inflation and FX reserves of the country has improved.
“Bulk of the adjustment has already occurred on the currency front,” announced the Bank.
However the Bank remain concerned about the rupee’s medium term outlook, due to factors such as easy monetary policy stance and rapid increase in short-term external debt.
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