Sri Lanka dollar peg weakened to Rs134.50 ahead of policy decision

ECONOMYNEXT – Sri Lanka has allowed the reference rate of the rupee to drop 20 cents Monday and authorities are intervening in forex markets at 134.50 to the US dollar, dealers said ahead of a policy rate announcement.

Last week the intervention rate was dropped to 15 cents to 134.30 to the US dollar.

Weakening the currency and intervening at each new level and sterilizing the sales with more liquidity is a ritual that is followed by the monetary authority during every balance of payments crisis in Sri Lanka, until reserve losses make it impossible to avoid a genuine float, analysts say.

In money markets Monday clean money was quoted at 6.35/35 and gilt baked repos at 6.30/40 cents, dealers said, with a bond auction also closing today.

Sri Lanka has a soft-peg to the US dollars and the Central Bank, periodically generate balance of payments by resisting interest rate hikes with printed money. The last crisis was generated in 2011/2012.

The Central Bank is expected to make a policy announcement at 7.30 pm Monday.

Though economic analysts say an interest rate hike is needed to generate more saving and allow credit markets to function after a salary hikes and subsidies pushed up spending, some market participants expect a rate cut or a reserve ratio cut.

China also cut its reserve ratio recently and allowed the Yuan to fall, after steadily appreciating it from 2005, and Sri Lanka has also cut its reserve ratio during previous balance of payments crises.

A reserve ratio cut release more liquidity to fire credit generating more pressure on the currency peg. (Colombo/Aug31/2015)

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