Sri Lanka closes below 181 to US dollar in ‘flexible exchange rate’ policy

ECONOMYNEXT – Sri Lanka’s rupee closed below 181 to the US dollar on Friday, despite foreign investor sales falling, official data showed.

Foreign investor held bonds barely fell, ending the week at 109.6 billion rupees in the week to September 18, down from 110.2 billion rupees a week earlier.

Data for Friday bond sales were not available.

The rupee closed around 181 to the US dollar after a spike in unsterilized excess liquidity.

Excess liquidity shot up with banks depositing over 70 billion rupees at the central bank over the week.

The central bank intervenes in forex markets and buys dollars at the drop of a hat, especially from the Treasury, without waiting for a ‘disorderly appreciation’ appreciation of the rupee, injecting base money, pegging the rupee and generating liquidity shocks, analysts have pointed out.

Excess liquidity from dollar purchases are then left unsterilized for a long period.

When pressure comes to the rupee, however interventions are delayed until a ‘disorderly fall’ of the rupee, in a skewed policy.

When interventions are made after a ‘disorderly fall’, any liquidity shortages are also ‘sterilized’ of money is printed overnight, in another skewed policy, unlike the policy of keeping cash from dollar purchases unsterilized for a extended periods, leading to permanent falls of the rupee.

Due to the skewed policies, the rupee is weakening despite slow or negative private credit.

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Analysts have pointed out that it is difficult for the central bank to push down the rupee when private credit is weak.

Since the creation of the central bank in 1950 the rupee has been pushed down from 4.70 to 181 to the US dollar. India, Pakistna, Maldives, Mauritius, Dubai also had the same rate at independence, until soft-pegs were created. (Colombo/Sept21/2019)