ECONOMYNEXT – Sri Lanka’s banks are quoting rates of Rs197/203 to the US dollar on Tuesday, stronger from around 226/233 to the US dollar a day earlier, following an official request, financial sources said.
Sri Lanka has no interbank spot market to establish a rupee/dollar price and foreign exchange is matched within banks and in an over-the-counter market.
The rupee had fallen to around 238 to the US dollar Monday, in the OTC market, financial sources said despite attempts by a group of banks to stabilize it at around 230 to the US dollar.
Bank chiefs were requested in writing by authorities to bring the rupee to near 200 levels financial sources said.
It is not clear how much dollars banks can supply at these rates. State-run Bank of Ceylon said the rates applied to transactions below 2,500 dollars. A day earlier it had applied to only 100 dollars.
Several banks said the rates applied to only small transactions.
Even tighter rationing of letters of credit could take place, they said.
Pegged currencies fall when a central bank injects liquidity stimulating credit and imports, preventing outflows from being limited to inflows of foreign exchange.
Liquidity has been mostly injected through failed bill and bond auctions, which have price controls. The new rupees are then used by the government to pay salaries and meet expenses. If a maturing debt is bought by the central bank, past deficits are monetized.
Sri Lanka’s central bank raised policy rates by 50 basis points in August and also hiked the margin commercial banks must keep with the monetary authority to 4 percent from 2 percent. (Colombo/Sept07/2021)