Sri Lanka not intervening; forex, bill markets as automatic stabilizers: CB
ECONOMYNEXT – Sri Lanka’s central bank is not intervening in forex or Treasury bill auctions, but are allowing market forces to respond, Deputy Central Bank Governor Nandalal Weerasinghe said.
"We have said that we will allow market forces to work and the currency to adjust," Weerasinghe told reporters.
"So the market is responding. In the short-term this type of volatility is there. It is not only in Sri Lanka we saw it in global markets also.
"When markets respond it is an automatic stabilizer and markets are adjusted."
Sri Lanka’s central bank allowed the rupee to free float over the last two days after a shock defeat for the ruling coalition in local council polls led to panic buying of dollars.
Sri Lanka’s forex markets do not have depth because the central bank has slapped tight ceilings on overnight open dollar positions of commercial banks.
The rupee fell as low as 155.90 to the US dollar in the spot market later bounced back.
On Thursday the rupee closed at 154.80/90 to the US dollar up from Wednesday’s 155.35/45 after falling to intra-day lows of 155/80/85.
The central bank also allowed Treasury bill yields to move up as much 34 basis points at Wednesday’s auction without rejecting bids and purchasing bills with printed money.
Purchasing Treasury bill with printed money or releasing liquidity tied up in term repos (a mass scale legalized counterfeiting process) is the principle method through which the central bank builds pressure on the rupee by generating an excess of rupees over dollars coming in.
Central Bank Governor Indrajit Coomaraswamy said the rise in bill yields was probably due to weaker confidence.
Sri Lanka’s current political instability has led to foreign selling in bonds and fears that fiscal consolidation and a planned automatic price formula will be abandoned pushing interest rates higher. (Colombo/Feb16/2018)