ECONOMYNEXT – Sri Lankas’s rupee closed around 343/348 to the US dollar in the spot market Thursday amid heavy bank selling and hardly any importer demand, dealers said, up from 353.46/353.50 rupees a day earlier.
Sri Lanka’s rupee gained after the central bank relaxed a surrender rule, releasing more dollars to the market, after earlier hiking rates and phasing out money printing.
Private credit is also negative and taxes have been raised and energy market priced further reducing domestic credit.
Exchange rate pegs come under pressure when the central bank injects liquidity to mis-target rates and banks make loans with the newly created money instead of deposits.
“Most banks are now oversold,” a dealer said, indicating that net open positions are no longer positive in most banks.
“There isn’t an unlimited supply of dollars.”
There was not much exporter selling, dealers said. Exporters also have to sell to commercial banks under a repatriation rule, which was brought after money was printed to mis-target rates triggering forex shortages.
The central bank announced a guidance peg of 353.46 to the US dollar Thursday with a 7.50 rupee variance on either side.
On Thursday business was done around 346.15 US at the stronger end of the trading bank and a little weaker.
The guidance peg was brought in 2022 after attempt at float failed due to the surrender rule where banks were forced to sell 50 percent of their inflows to the central bank.
When the central bank buys, dollars disappear from the interbank market and rupees appear, preventing the currency peg from strengthening, if domestic credit is strong.
Amid almost non-existent importer demand, the central bank is estimated to have bought 80 to 100 million dollars on Thursday, dealers said.
The liquidity shortages originally came from short-term sterilized interventions (fx reserve losses) at time when domestic credit was driven by artificially low rates as reserves were used for imports and the country defaulted on its debt. (Colombo/Mar02/2023)
243/348? Are you sure
Puzzling headlines and seems to misdirect the reader?