The 'magic' behind the rupee's depreciation against the dollar and what's going to happen to vehicle imports - Dhananath Fernando's analysis

Renowned economic analyst and CEO of Advocata Institute, Dhananath Fernando, has provided an explanation regarding the recent appreciation of the Rupee against the US Dollar. 

We saw the value of the dollar increasing.

Similarly, we saw the Rupee depreciate. However, looking at the period since last Thursday, we can say that this trend has reversed. Now, the Rupee is gradually appreciating again; meaning the value of the dollar is decreasing. A common question for many is how this gradually increased. Some predicted it would go close to 380, 400. That was our belief too. But it has reversed again. What is the reason for this reversal?

This happened especially on Thursday night. First, we need to understand why it initially depreciated, and why there was a significant depreciation on Thursday night or by the end of Thursday. There were several main reasons for this.

One reason is that, as we all know, the Rupee had been depreciating to some extent since the beginning of May and for some time. Since the beginning of May, the rate of this depreciation started to increase slightly, after the Rupee began changing by two or three rupees at a time.

What happens then is that exporters bringing dollars to the market, and anyone else bringing dollars, start to think twice about bringing them. They think, "Since it's continuously depreciating, I will incur a loss if I convert these dollars into rupees today."

So, by Thursday night, this situation intensified a bit. This is because, gradually, over the two preceding days, the Rupee had depreciated by about two or three rupees. By Thursday, hardly any exporters brought dollars to the market. Also, after seeing the speed of this depreciation, the other thing that happened was that importers became a bit scared. So, they started demanding more and more dollars from the market.

Meanwhile, my opinion is that a few days prior, the government also imposed a 50% surcharge on the customs duty for vehicle imports. That also sent a small signal to the market. It means the market thinks the government is under some pressure. The signal is that they are trying to stop this because there are no dollars.

Then, it's not just vehicles; we know that many importers tend to stock up as much as possible on non-perishable goods. The reason for this is the assumption that tomorrow's price will be higher than today's.

On the other hand, many importers now need to deposit a certain amount when opening a Letter of Credit (LC). However, they also open the LC by taking a loan. According to the guidelines of each bank, at least 10% must be deposited. Let's say I open an LC for 100 dollars. If I need to deposit 30,000 rupees for 100 dollars, then the entire 30,000 must be deposited. Some deposit 3,000 or 6,000 rupees and take the remaining 24,000 as a loan from the bank. The bank also had the ability to lend at this time because there were a bit more rupees in the market.

So, by Thursday, a large number of people started coming to open LCs. What happened then was that the dollar depreciated significantly, reaching levels of 353, 354.

However, by Thursday evening or night, a discussion took place between the main dealers and banks with the Central Bank. To our knowledge, the Central Bank Governor also participated in this. They discussed "Why is this happening? What should be done about it?" and a small indication was given.

We know there is currently a law that if an exporter brings in dollars, for example, if 100 dollars from tea exports are in a bank account, those 100 dollars must be converted into rupees within 90 days of export. This is a law. At that point, there was an indication that this conversion period would be reduced.

Since exporters would face a challenge, they knew that dollars would definitely come into the market. Therefore, they were largely inclined to exchange dollars in the market on Friday. They made that decision because Saturday and Sunday were the weekend, and by then, a good exchange rate had emerged. We can say that everyone acted very strategically there. Yes, they acted strategically. Because that's how exporters always look at things.

Also, the reduction of this conversion period to 30 days could be a strategic step taken by the Central Bank Governor or the Central Bank. This is because it is a bit difficult for the Central Bank to use its reserves to bring down the exchange rate at this moment. This is because there is an International Monetary Fund (IMF) review at the end of this week. So, it's difficult to do that. They have certain reserve targets to maintain. On the other hand, let's discuss that later.

Another special feature of Friday is that it is usually a day when foreign remittances come into the market a bit more. Also, it's a day when LCs or Letters of Credit are not opened as much.

So, by Friday, a large amount of dollars came into the market. This means supply increased and demand decreased. Therefore, a rapid appreciation of the Rupee occurred on Friday. Although not to the same extent, the Rupee appreciated very slightly today as well. This is because dollars are now coming into the market. People are exchanging dollars because there is a suspicion that if they hold onto dollars any longer, the Rupee will appreciate further, leading to losses. Also, there is confidence that funds from the International Monetary Fund will be received.

Therefore, I believe these things are happening with the market sentiment now being, "Ah... there's no dollar problem, they're coming in a bit now." Taking the period since last Thursday, the market has received a somewhat positive signal. That is a very positive situation.