Frontier Research’s View on the Rupee and Interest Rates After the External Debt Default
Currency and interest rate markets could become volatile in the near term following the government’s announcement of a temporary suspension of foreign debt repayments, Frontier Research said last week.
Here is an overview of his ideas on the short and medium term impact of the evolution of the rupee and interest rates.
Governor Dr Nandalal Weerasinghe mentioned at the press conference that CBSL would reduce mandatory dollar sales by banks from 50% to 25%. This should help improve dollar liquidity in banks once the debt suspension becomes clearer and calmer.
Treasury Secretary Mahinda Siriwardena said he will soon issue a circular cutting spending and announcing new revenue measures. The external debt suspension also reduces treasury spending and reduces the issuance of rupee government securities at the CBSL to facilitate dollar purchases for debt repayment.
Key next steps would be to see if this path continues with additional measures taken, particularly in terms of politically difficult actions such as fully cost-reflecting energy pricing and raising taxes.
Regardless of these policy statements and the new team’s increased transparency on the issues, the market could become volatile in the short term given the preference for a negotiated suspension over a preemptive suspension. Thus, it is possible for the rupee to rise above the most likely scenario, the upper end of Rs. 350 per dollar.
On the rate side, the market could continue to be illiquid pending further clarity and the next round of bill and bond auctions. But exceeding both returns above 25% is possible in limited trades.
But it is important to understand that this prospect for the end of 2022 is 8.5 months away. Key determinants will be resolving the political impasse in a way that restores confidence to local and international business stakeholders, whether the actions the Treasury Secretary and CBSL Governor take and report actually happen as soon as possible. , the pace and success of the negotiations with the IMF and the restructuring of the debt, in parallel with the completion of the bridge financing.
The most likely scenario expects the Rupee exchange rate to be between Rs. 270 and Rs. 350 (against USD) by the end of 2022. CBSL was Rs. 313.67.
On the 12-month Treasury bill rate, the most likely scenario is that it will be between 14.0% and 20.0% by the end of 2022. At the April 11 Treasury bill auction , the weighted average return over 12 months was 23.36%.