Dec17, 2019 (LBO) - Sri Lanka's overview activities in the economy improved post presidential election driven by positive sentiments from the local investors, a rating agency said.
"Bourse saw gains especially in manufacturing, trading, power & energy, and beverage, food, & tobacco sectors," ICRA Lanka Limited, subsidiary of ICRA limited, a group company of Moody’s Investors Service
"Demand for government securities surged causing the yield curve to push down easing off the cost of borrowing for the government."
In this backdrop, exchange rate appreciated notably in the second half of the month.
However, the report says the weaker external condition that prevailed during the first half of the month caused the reserve position to weaken. Foreigners were seen exiting debt and equity markets by exploiting on the heightened local investor sentiment.
CBSL injected liquidity for the most part of the month trying to drive call rates down.
Manufacturing sector is expected to pick up in November to meet the upcoming festive season demand. Consequently, wages may have grown faster than the inflation rate in the same month.
Tourism sector showed further recovery. The long-term interest rates continue to decline as a result of the lending cap.
Inflation also declined as a result of slowdown in prices of both food and nonfood items.
Interest rates short-term rates call rate continued to rise marginally in November on the back of rising demand for credit from the private sector ahead of the festive season.
CBSL was seen injecting liquidity till the last week of the month to moderate the effect. In this background, CBSL held the policy rates unchanged for December.
Recent developments have helped to push down the rates on government securities helping to ease off the borrowing cost for the government.
T-bill yields in the secondary market continued to decline as secondary market activity peaked following the presidential election.
Generally, in November exports gets weaker while imports can peak up leading to pressure on rupee.
Rupee was seen depreciating till the mid-month and subsequent to the Presidential Election, experienced a sharp appreciation against US$ with minor moderation towards the month end.
Rupee is expected to depreciate but also to maintain some momentum in December amidst the downward pressure.
Exports generally pick up in December which can strengthen the rupee.
The report added that December is generally a weak month for equities and we do not expect much movement in stocks.
Debt market may also experience less action as the holiday season starts.
Rupee is expected to depreciate but maintain some momentum in December amidst the downward pressure as exports pick up.
If the rupee can hold its strength, we expect the reserve position to improve in December.
Long term interest rates are likely to experience further decline, the report said.