Up until November of last year, the Sri Lankan Rupee had been pegged to the US Dollar in the vicinity of 110 Rupees / Dollar. At that time, following the advice of the IMF and in order to boost the competitiveness of exports, the Sri Lankan central bank performed a one-off devaluation (at least that was the expectation at the time) of 3%. Over the following two months the economy continued to struggle, so in the beginning of February 2012 the decision was made to remove the peg completely. It's been in something of a free fall since then and the currency has yet to find a firm footing. Here's the events described in this paragraph in visual form:
That weakening stretch since February has resulted in the Rupee being the currency that has weakened more against the Dollar in 2012 than any other. In many cases a weakening currency provides a boost to equities because of the beneficial effect on export pricing. But when the weakening is pronounced and appears uncontrolled, as in this case, the effect is the opposite. Here's GDP growth (acutal and estimate) against the benchmark Sri Lankan equity index (Sri Lankan Colombo All Share):
Both stocks and GDP growth have been on a nice run since 2007 but the current trend is worrisome.
According to this article from the Pakistani based Business Recorder, the Sri Lankan CB is expecting a recent inflow of $350 million to help stabilize the currency. Others have their doubts. From that same article:
But currency dealers said they were skeptical the inflows would ease depreciation pressure on the rupee, as the inflows would not be coming to the market.
Instead, dealers said the central bank has been absorbing them via swaps.
"If those inflows are swaps, definitely they are not going to help the market." said a currency dealer on condition of anonymity.
Cabraal said a "fair amount" of the inflows will be absorbed by the central bank to boost reserves.
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