Sri Lanka rupee forwards weaker, volatility high amid trading restrictions

ECONOMYNEXT – Sri Lanka’s rupee weakened to 148.50 to the US dollar levels in the one week forward market Tuesday 146.90/147.10 a day earlier, dealer said amid trading restriction that had chocked off price discovery and depth.

There is no spot trading and the ‘official’ reference rate is 144.50 to the US dollar. The central bank has also clamped down on the spot next (settlement four days ahead), where trading has also stopped.

Some trading happens only in the one week forward market.

The one week rupee was quoted at 147.30 levels in morning trade before slipping to 148.50 level.

Authorities have started demanding trade bills for all interbank dollar purchases over the past month.

In the past banks were allowed to trade according to a defined ‘net open position’ which was narrowed during balance of payments crises to worsen volatility. Now even trading within the net open positions are restricted with trade backed bills being demanded by authorities.

EN’s policy columnists had warned last year that narrow net open positions increases volatility and reduces the depth of the market, contributing to the volatility of the rupee.

An International Monetary Fund also warned against the restrictions.

"Continued efforts are needed to deepen the forex market to facilitate price discovery," an IMF staff report said.

"Traders cannot smooth interventions by building short or long positions to anticipate large orders, which leads to higher market volatility and less depth,"

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Over June the Central Bank had not printed large volumes of rupees and its Treasury bill stock has remained steady. On Friday a 20 billion rupees was injected to the market through a reverse repo auction. Overnight money rates have also been held at 8.18 percent. (Colombo/June21/2016)

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