Sri Lanka will see an additional $486 million inflow through the central bank's decision to increase foreign investment in rupee denominated treasury bonds, central bank data showed on Friday. However, currency dealers said the decision will hit exporters and increase the trade deficit in short term.
"If all bonds are bought by foreigners in near future, the rupee might fall down to 105 per dollar, which will not be attractive to exports," said Chirantha Caldera, a currency dealer in Commercial Bank of Ceylon. "Exporters will get hit and trade deficit will widen, because of a sudden appreciation of the rupee."
Central bank decided to increase foreign investments in rupee denominated bonds to 10 percent from 5 percent of the total outstanding amount of t-bonds from November 30. The new directive will allow foreigners to buy an additional 53 billion rupee ($486 million) worth of rupee bonds, which is 5 percent of the total outstanding of t-bill worth 1,060 billion rupees as at now, central bank data showed on Friday.
The rupee rose 2.1 percent to 108.15/20 last week alone on speculation of a dollar inflow through the central bank's decision to double the foreign-held rupee bonds. However, central bank data showed foreign investors held only 47 billion rupees worth bonds out of 106 billion rupee worth maximum permitted level.
The rupee has risen just over 4 percent to nearly 109.00 per dollar from a record low of 113.57/113.62 hit on September 18, after the central bank sold a $500 million sovereign bond in October in addition to increased foreign investments in rupee-bonds.
The central bank's decision to relax the capital account to foreigners came after it rejected all bids in three straight bond auctions, citing yields demanded by investors were higher than what is warranted, given the current macro economic situation. Weekly bond auctions have been cancelled during the last two weeks, which has created pressure on treasury bill rates.
Sri Lanka's benchmark 91-day T-bill rate rose to a six-year high by 96 basis points to 18.99 percent at Wednesday's weekly auction and the central bank rejected the high yields demanded for longer dates, preferring not to sell the paper.
Last week, the 182 T-bill rate rose 94 basis points to 19.73 percent and the 364-day rate rose by 89 basis points to 19.96 percent. Both were at their highest level since April 2001. Sri Lanka's trade deficit narrowed slightly to $2.85 billion in the first ten months of 2007 from $2.96 billion in the same period last year, the central bank said on Friday.
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