Rupee could depreciate over 5% amid Iran conflict – First Capital

First Capital Holdings PLC in its latest Economic Outlook Amid the Iran Conflict forecasts that the Sri Lankan rupee could depreciate by around 5% during the year.

“However, given the increased external pressure and strain on the current account, there is a clear risk that the depreciation could exceed initial projections,” the report said.

With escalating tensions in the Middle East, the US dollar has strengthened as global investors move toward safe haven assets.

“As of 3 March, the Dollar Index had risen sharply to around 99.20, up from the 97.60 range at which it had been hovering prior to the escalation, while the Sri Lankan rupee opened weaker but ultimately settled largely unchanged at 309.24, according to the indicative rate of the Central Bank of Sri Lanka.”

The report also noted that weakening export demand could place additional pressure on Sri Lanka’s balance of trade (BoT).

“Nearly a quarter of Sri Lanka’s coffee, tea and spice exports are directed to markets currently affected by geopolitical tensions, including the United States, Iran, Iraq and the Gulf region, leaving this key export segment exposed to elevated external risks.”

It added that potential increases in freight and insurance costs could further worsen the situation.

“Combined with higher logistics and insurance expenses, the overall impact is likely to be negative for Sri Lanka’s balance of trade and could place additional downward pressure on the rupee.”

The report also warned that the conflict could have broader negative spillover effects on the domestic economy, affecting several sectors through higher costs, weaker external demand and increased global financial uncertainty.