Sri Lanka closes forward forex market
ECONOMYNEXT – Sri Lanka has barred commercial banks from trading foreign exchange forward for three months as the currency came under pressure amid high levels of excess liquidity.
“In view of the need to avoid excess volatility in the foreign exchange market and the impact on banks’ risk management, licensed commercial banks are hereby informed to refrain from entering into forward contracts of foreign exchange for a period of three months with immediate effect,” Central Bank Governor W D Lakshman said in a direction.
Sri Lanka rupee has fallen from around 185 to close to 200 to the US dollar over the past month and forward premiums have inverted as dollar yields overtook rupee yields.
The inverted forward premiums had discouraged exporters from selling forward.
Since January 01, excess liquidity in money markets has been allowed to fall from 266 billion rupees to 117.5 billion rupees mainly due to unsterilized dollar sales, but the central bank itself has mopped up some liquidity.
Falls in liquidity will tends to tighten the credit system and eventually strengthen the soft-peg with the US dollar.
Sri Lanka’s rupee closed around 196.00/199.00 to the US dollar in the spot next markets Monday after moving in intra-day trade, while bond yields remained unchanged ahead of a 75 billion rupees bond auction on Tuesday, dealers said.
A steady drain on reserves, particularly after credit downgrades hurt confidence, has shown that interest rates are mis-aligned, analysts say.
Sri Lanka’s stock however are booming to record levels.
Following requests from banks the interbank transactions were allowed to resume for swap transactions to take place a week alter, market participants said. (Colombo/Jan25/2021 – Updated Feb03 with swap market)