Sri Lanka rupee falls to new record low of 140.90/141.00 in forex markets

ECONOMYNEXT – Sri Lanka’s rupee closed at a new record low of 140.90/141.00 to the US dollar in forex markets down from yesterday’s close of 140.15/30 dealers said as data indicated continued reserve outflows.

Excess liquidity in money markets fell to 63 billion rupees from 86 billion rupees, indicating continued foreign reserve outflows, despite an attempt to reduce interventions and ‘float’ the currency from September 04.

The intervention was pre-sterilized with a rejection of bids at a bill auction and printing money to repay bills last week, preventing interest rates from going up.

Last Friday excess liquidity in money markets rose by 30 billion rupees to 86 billion rupees after an entire maturity of Treasury bills were repaid with printed money.

Though sterilized foreign exchange sales may look neutral from a macro level (liquidity injections are matched by foreign reserve outflows and the money base is unchanged) they fire credit at a micro level, EN’s economic analyst Bellwether says.

"Domestic asset purchases by the Central Bank (T-bills) do not necessarily inject printed money to the same customer or bank that is taking the money out, but can increase cash reserves in one or more banks, expanding their ability to give new loans, and keeping rates down overall," Bellwether says.

"This is why soft-pegged countries in East Asia and Latin America get into balance of payments crises regularly."

EN’s The Price Signal by Bellwether has documented forecasted the build-up of the current soft-pegged balance of payments crises over the past 10 months.

Authorities have consistently released liquidity or printed money to resist a contraction in the monetary base or a rise in short term interest rates.

Sri Lanka has attempted to float the rupee during this crises without raising policy rates, despite a sharp pick up in domestic credit from early 2015 as state wages and subsidies expanded and domestic borrowings ratcheted up.

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Analysts had warned that attempts to ‘float’ a currency in Sri Lanka (end sterilized interventions) is undermined by partial interventions and full sterilizations, dollar surrenders by the state to the monetary authority.

Narrow net open positions of commercial banks may also contribute by forcing dollar conversions into rupees. (Colombo, Sept16/2015 – Update II CORRECTED – spot US dollar closing price was Rs140.90/141.00 not 140.00)

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