July 11 (Reuters) COLOMBO- Sri Lanka's central bank is concerned about the dollar hoarding and market manipulation that's exacerbating the rupee's weakness and has the tools to correct any misalignment in the exchange rate, its governor told Reuters.
The rupee has been falling steadily since April and is on course to retest recent historic lows. It could fall as much as 8 percent for the full year against the dollar in 2018 as exporters hold back on converting their dollar earnings into the local currency, traders and analysts said.
The country’s massive trade deficit has been primarily behind the rupee’s four percent fall so far this year. It was last traded at 159.30 to the dollar, recovering from an all-time low of 161.17 that it hit on June 20. It fell 2.6 percent in 2017.
“We are in the process of collecting export earning data from banks,” central bank governor Indrajit Coomaraswamy told Reuters on the sidelines of an event in Colombo on Monday.
In earlier emailed comments, he said “there is concern that exporters have not been converting their proceeds because there has been some reduction in the inflows to the market that does not seem warranted by underlying fundamentals.”
The central bank is in the process of assessing if the currency depreciation is a result of a market manipulation and “misaligned with underlying fundamentals”, he said. The central bank does not see “any fundamental reasons” for the rupee’s weakness, he said.
“If at any point we conclude there is such misalignment, the central bank has the tools to address this without depleting reserves. However, we certainly do not want to take such measures. They are not good for banks, exporters, importers and the economy as a whole,” Coomaraswamy said in his emailed comments.
Exporters, who dominate the island nation’s economy and are benefiting from the currency weakness, are investing their foreign currency earnings in dollar-denominated securities amid fears that the rupee is set to fall further, traders said.
Danushka Samarasinghe, head of research at Colombo-based Softlogic Stockbrokers, said the rupee could depreciate between 6 percent and 8 percent this year. That would take it to levels of between 163.50 and 167.00 the year end.
At least four currency dealers, who spoke to Reuters on condition of anonymity because they are not authorized to talk to media, said they expect at least 6 percent fall in the rupee this year.
The central bank has intervened in May and June when the rupee faced heavy downward pressure.
A currency dealer in a local bank said most big time exporters, instead of converting dollars, have invested their foreign currency in the dollar-denominated Sri Lanka Development Bonds that offer a 6 percent yield.
The rupee is also being hurt by foreign outflows from government securities because of rising U.S. yields, said Murtaza Jafferjee, Research Analyst at JB Securities.
About $185 million, or 9 percent, of total government securities held by foreigners has been pulled out since April 25.
“Most of the exporters will hold on (to dollars) if the trend is to depreciate,” Jafferjee told Reuters.