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Foreigners buy Sri Lanka rupee bonds for second week

ECONOMYNEXT – Foreign investors have bought Sri Lanka rupee bonds for the second week running ending several months of net selling, official data shows.

Foreign holdings of rupee bonds fell to a low of 11.7 billion rupees on September 02, increased to 12.6
billion rupees on September 09 and 13.5 billion rupees on September 16.

Sri Lanka’s foreign holdings of rupee bond fell from around 450 billion rupees at the beginning of 2015 due to monetary instability coming from pro-cyclical liquidity injections and the rupee fell.

Unsound money was deliberately pursued as part of Real Effective Exchange Rate Targeting to keep real wages down and give extra profits to exporters. Bondholders fled with the rupee falling from 131 to 182 to the US dollar in two currency crises.

Sri Lanka’s state minister for money and capital market, Nivard Cabraal has said a forward exchange rate guarantee is to be offered for buyers of rupee bonds.

There was also a policy to keep the rupee stable.

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Sri Lanka’s rupee started to fall after a soft-pegged central bank was set up in 1951 in the style of several set up in Latin America with room to print money and sterilize the balance of payments.

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At the time there was no intention to deliberately depreciate the rupee and preserving the external value of the rupee was an objective.

A convertibility undertaking (such as what is being envisaged through the swap) was implied not just for foreign investors but for all economic players.

However, it is not possible to maintain the exchange rate if liquidity is injected to push down rates, when domestic credit pick up or when the anchor currency central bank (the US Fed) raises rates. (Colombo/Sept19/2020-sb)

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