Sri Lanka intervenes on both sides to keep soft-peg in January 2020

ECONOMYNEXT – Sri Lanka has bought 149 million dollars in forex markets to prevent the rupee from appreciating and sold 60 million dollars to keep it falling, not counting any transactions with the state, central bank data shows.

The sale of 60 million dollars indicates a more balanced deployment of convertibility undertakings and indicates a slight department from the panic creating one sided, disorderly market conditions (DCM) rule practiced in recent years, analysts say.

In December the central bank bought 1.20 million dollars and sold 5.0 million dollars.

Analysts have blamed Sri Lanka’s falling rupee – the worst performing monetary authority among South Asian nations where Maldives leads the pack at an absolute level – on skewed convertibility undertakings and targeting a narrow overnight rate with large volumes of excess liquidity, when credit picks up.

Economists have called for reform of the peg, or to go for genuine inflation targeting with a floating exchange rate.

In December Sri Lanka’s central bank prints money to accommodate a seasonal draw down of currency and generally withdraws it in January. Dollar sales also suck in excess cash.

Though cash was over-issued in December, excess liquidity has generally eased as term reverse repo contracts were terminated.

Sri Lanka however cut policy rates on January 30, as the state borrowings are set to pick up after tax cuts and private credit is also showing signs of picking up.

Sri Lanka has a so-called soft-peg where rupees are injected to bring down rates and dollars are also bought and sold to target the exchange rate.

However the currency collapses when credit picks up and rupees withdrawn from the reserve money supply is replaced with fresh injections to keep down rates over a long period. (Colombo/Feb18/2020)