Sri Lanka finance minister talks down rupee
ECONOMYNEXT – Sri Lanka’s finance minister Mangala Samaraweera talked down the rupee as the soft-pegged currency hit a new low below 171 to the US dollar in the spot forex market.
"The rupee can fall some more, I am not saying it won’t," Samaraweera told parliament.
He said Sri Lanka had to conserve foreign reserves as it was needed for debt repayments.
However there was no clear sign yet that the central bank is floating the rupee.
Samaraweera said while the rupee falling had so far not pushed up consumer prices, and exporters, tourism operators and foreign guest workers can benefit.
It is not clear why the rupee is being talked down. However Samaraweera said India’s rupee had fallen further.
Meanwhile, the central bank also admitted that it bought dollars in the market last Monday, effectively nipping a float in the bud and Central Bank Governor Indrajit Coomaraswamy expressed satisfaction that the rupees’ real effective exchange rate index was at 100, following the latest collapse.
The central bank had earlier let the currency slide in a switch to floating style regime without intervening, with excess liquidity in place as a result of pegging, which analysts have warned it not to do.
However money markets are now tight partially due to liquidity shortages coming from a maturing hedging deal done in 2013 and interventions in the forex markets.
Overnight rates are now near the 8.50 policy ceiling. With a tightened credit system any float will have a greater chance of succeeding.
A float will clear uncertainty and quickly bring interest rates down rather than waiting. Prolonged liquidity shortages generate output shocks. Unless the currency bounces back the shock will could be bigger.
Soft-pegged regimes which have contradictory policy are subject to pressure (weak credibility of the peg) when rates are not allowed to adjust to market and tend to have high nominal interest rates.
On Tuesday, overnight repo markets hit 8.75 percent, 25 basis points above 8.50 percent policy ceiling.
Unlike a run around May 2018, the central bank had cut net open positions of banks, which analysts had warned tends to make the rupee more volatile. (Colombo/Oct10/2018)