Sri Lanka central bank talks up the rupee
ECONOMYNEXT – Sri Lanka’s central bank talked up the rupee, as the currency fell to a fresh intra-day low almost touching 159 to the US dollar in the spot market.
"The underlying fundamentals do not warrant the current pressure on the Sri Lanka rupee," the central bank said.
"Gross external reserves are presently at a healthy USD 9.1 bn and the real effective exchange rate indices indicate that the currency is competitive.
"The pressure on the currency is, therefore, unwarranted."
The rupee came under pressure after the central bank cut rates amid a rate spike and injected large volumes of cash in the market amid a seasonal drawdown of cash.
Currency pressure is a result of a so-called soft-pegged central bank trying to control both interest rates (printing money) and the exchange rate at the same time.
The bank has continued to allow excess liquidity in the system despite pressure on the currency. On May 16 excess liquidity rose to 11.8 billion rupees from 3.0 billion rupees a day earlier.
Excess liquidity can rise due to daily cash variations in banks or an unsterilized dollar purchase.
Sri Lanka’s central bank has been known in the past to make unsterilized dollar purchases in the midst of currency pressure. While an unsterilized purchase adds to reserves, unless all the dollars are sold again to defend the currency, when the liquidity generated is used by banks, the currency will weaken, analysts warn.
An unsterilized dollar purchase is pegging, and is incompatible with a float. (Update II)
The full statement is reproduced below:
CBSL Determined to Curb Unwarranted Depreciation of the Rupee
The underlying fundamentals do not warrant the current pressure on the Sri Lanka rupee. Gross external reserves are presently at a healthy USD 9.1 bn and the real effective exchange rate indices indicate that the currency is competitive.
The pressure on the currency is, therefore, unwarranted.
The following inflows are expected to boost the current robust level of reserves in the coming weeks.
– USD 250 mn as the next tranche of the IMF EFF in early June;
– USD 585 mn as the final payment on the long lease of the Hambantota port during the 2nd week of June 2018; and
– USD 1 bn as the proceeds of a syndicated term loan due in mid-June 2018.
Gross external reserves are, therefore, expected to amount to a record close to USD 11 bn by mid-June 2018.
While being committed to flexible exchange rate management, the CBSL has the option of using a part of its unprecedentedly large external reserves to trigger a material appreciation of the rupee to prevent unwarranted depreciation of the currency, particularly as it is not justified by the underlying fundamentals. (Colombo/May17/2018)