A Currency forecast by BMI Research last week predicted that the Sri Lankan rupee may continue to depreciate mainly due to rising inflationary pressures. Nevertheless, the government’s fiscal consolidation efforts and the likely reinstatement of the GSP Plus trade concession should support continued investment inflows and a recovery in trade, which should partly offset some of the downward pressures on the rupee.
They forecasted the rupee to weaken to LKR157.80/USD and LKR159.40/USD by the end of 2017 and 2018, respectively.
“We expect the rupee to depreciate steadily by approximately 3.5% to LKR 157.8 0 / USD by the end of 2017, from LKR152.4 2/USD on May 5. Despite a cumulative 125bps worth of interest rate hikes since the start of 2016, inflation continues to climb higher, rising to 8 .6% y-o-y in March from 8 .2% y-o-y in February,” the report observed.
On a longer term horizon however, the rupee is likely to depreciate gradually, averaging LKR158 .6 0 /USD in 20 18 as rupee remains overvalued in REER terms.
It further stated that Inflation will also be higher compared to the US and further monetary tightening by the central bank will only have a limited effect in offsetting the rupee’s depreciation.