Rupee weakens to new lows with dollar quoted around 191

COLOMBO: Sri Lanka’s rupee weakened to new lows with the US dollar quoted around 190.50 to 191.00 levels in the spot next market and one weeks offered around 193 levels, dealers said, amid record money printing and low interest rates, Economy Next reported.

Market activity was patchy with sporadic quotes in the spot next markets, though there were offers at around 193 in one week forwards, market participants said.

Sri Lanka has been printing record volumes of money under Modern Monetary Theory, leading to downgrades and steep rises in the yields of sovereign bonds.

The printing has pushed rupee interest rates and pushed up dollar yields as banks bought sovereign bonds.

In the absence of money printing and an interest rate that matches the financial account, bank purchase of bond would automatically lead to a contraction in imports as domestic credit is turned from consumption and domestic investment to the purchase of bonds.

Exporters have also been lending money to banks and borrowing rupees due to out of line rupee interest rates, instead of selling in the spot of forward market. Money printing has inverted forward rates.

The purchase of sovereign bonds maturing in 2021 by banks would be equal to domestic financing of the debt as maturing proceeds would remain in the country which the government could borrow if necessary, Economy Next reported.

Analysts had warned in early 2020 and late 2019 that the obsession would low interest rates and continued monetary indiscipline by authorities would lead to downgrades and external instability.