Rupee to Gently Appreciation, Reserves to Top $10bn - CB Governor Cabraal

04th January 2011, www.island.lk

Central Bank Governor Ajith Nivard Cabraal said the rupee would gently appreciate this year. With foreign currency inflows expected to pick up this year, he said the rupee would tend to appreciate but the rupee/dollar exchange rate would be kept stable with the Central Bank absorbing large inflows to prevent a sudden appreciation. In 2010, the rupee gained 3.1 percent against the greenback.

"We would allow the trend to continue (the appreciation of the rupee against the dollar) but we would ensure there is exchange rate stability because this is important," Cabraal said presenting the ‘Road Map: Monetary and Financial Sector Policies for 2011 and Beyond’ at the Central Bank auditorium yesterday (4).

"There will be a gentle appreciation of the rupee this year (2011)," he said. Cabraal said the Treasury room of the Central Bank was gearing to the eventuality of official foreign currency reserves reaching US$ 10 billion, which he said would be soon. At present reserves are near US$ 6.6 billion, enough to finance exports for 6.1 months.

According to Central Bank estimates, export earnings grew 13.3 percent in 2010, earnings from tourism increased 61.4 percent to US$ 501 million, worker remittances increased 24 percent to US$ 4.1 billion and are expected to continue to grow in 2011.

Dealers told The Island Financial Review that the rupee could appreciate to Rs. 109.50 against the dollar after appreciating near 3 percent beginning the year at 114.35 and closing 2010 at 110.94/65.

The Balance of Payments surplus is estimated at US$ 900 million in 2010 and US$ 350 million in 2011.

Although FDIs have performed below expectation, at US$ 500 million in 2010, Cabraal said conscious efforts to improve the country’s sovereign ratings and business climate would attract more investments, along with exchange control relaxations.

Improving investor confidence was vital and Cabraal said the downward sloping yield curve of Sri Lanka Sovereign Bonds was testament to having moved in the right direction.

A US$ 500 million bond issue in 2007 had a yield of 8.25 percent. In 2009 an issue for the same amount yielded 7.4 percent. The latest sovereign bond issue of US$ 1 billion last year attracted investors with a yield of 6.25 percent. This ten year bond was 6 times oversubscribed.

"Strong macroeconomic fundamentals, the end of a 30 year conflict and the ongoing successful performance under the IMF standby facility arrangement contributed to improved investor sentiment," Cabraal said.

Image: The Central Bank’s Road Map on Monetary and Financial Sector Policies for 2011 was unveiled at the John Exter Auditorium yesterday. Central Bank Governor Ajith Nivard Cabraal addressing top public officials and private sector executives. Picture by Sumanachandra Ariyawansa. (Courtesy www.dailynews.lk).