Nishan De Mel on Rupee Depreciation Implications

Hiran H.Senewiratne, in Island, 23 February 2017, where the title is “It is the speed of rupee depreciation or appreciation against the dollar that matters’

aansihanThe US dollar depreciation/appreciation against the rupee is nether a barometer to determine the strength of the economy nor the strength of the currency/rupee. The most important matter is to look at how and at what speed the rupee depreciated or appreciated against the dollar, a top economist said. “Currently, the US dollar has touched Rs 153.44 but this is not a parameter to determine the strength of the economy or the currency. When one looks at a developed economy like South Korea, as an example, they pay more “Won” for dollars, compared to the Sri Lankan rupee, which is an indication that appreciation of the dollar is not a parameter to determine the strength of the economy, Executive Director, Verite Research Dr Nishan de Mel told The Island Financial Review.  aa-bank-notes

“When we look at the US interest rate, currently it’s 2 percent, while Sri Lanka ‘s interest rate is around 15 percent. If the dollar appreciation is more than the difference in the interest rates here, it would be a problem to address, he said.

“Therefore, what matters is the speed of depreciation of rupee against the dollar. Currently, US $ dollar has crossed Rs 154.44 after three months, which is around 6 percent or a Rs 4.44 increase since November, which is not a big increase,” de Mel said.

“However, with high bank interest rates the rupee has depreciated by Rs 4.44 since November 2016, which is manageable. If the Central Bank artificially controls this, such a situation is bad for the economy, he said.

De Mel also said that if the dollar rate increases against the rupee, it would have some inflationary impact on imported items. But the other side of the coin is that it would encourage exports and discourage imports.

“A lot of the depreciation has already happened. So I would expect the interest rates be more stable , he said . “I expect not more than six percent depreciation, unless there are greater shocks, de Mel added.

Countries where the monetary policy is more prudent and the exchange rate does not move, including Hong Kong and Dubai, raised their indicative policy rate by 25 basis points this month soon after the Fed raised its rate.

Meanwhile, nation-wide consumer prices as measured by the National Consumer Price Index rose 6.5 percent in January from a year earlier, up 4.2 percent reported a month ago, data from the state statistics office showed.

The 12-month moving average inflation for which data is available since December 2015 jumped to a one-year high of 4.6 percent in January from 3.8 percent reported in December 2015, compared to 4.0 percent a month ago.

 

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Filed under accountability, commoditification, economic processes, governance, island economy, performance, sri lankan society, world events & processes

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