Sri Lanka rupee gains in intra-day trade
ECONOMYNEXT – Sri Lanka rupee strengthened to as much as 157.10/15 to the US dollar in intra-day trading in the spot market Friday, from historic low of 157.70/90 a day earlier, after comments from the central bank that it was allowing the market to determine the rate.
The rupee gained as much as 157.10/15 in mid-morning trade before falling back to 157.60/70 to the US dollar, dealers said.
Deputy Central Bank Governor Nandalal said the central bank was allowing the market to determine the rates despite having a 9.9 billion US dollar war chest of reserves, which it could use.
"We can intervene if necessary," he said. "But we are allowing the market to determine the rate."
Sri Lanka’s rupee came under pressure after a rate cut on April 04 and liquidity injections made to enforce rates sharply below the ceiling 8.50 percent ceiling policy rate as well as meet a seasonal real demand for cash.
When the rupee starts to slide, exporters usually holdback. When there is excess printed money in the system importers and exporters themselves can fund their spending with credit re-financed with the new money and generate pressure on the rupee.
Until the end of March, the central bank was following a pegged exchange rate regime, collecting dollars and sterilizing (mopping up) liquidity.
The switch to a floating regime occurred after the rate cut. Analysts say allowing the rupee to fall in line with pressure coming from liquidity injections is consistent with a floating rate.
On April 26, the central bank mopped up 23 billion rupees of excess liquidity at 7.60 percent levels but only on an overnight basis.
Analysts say the central bank should sell down its Treasury bill stock which suddenly rose to 73 billion rupees from 12 billion as new money was printed, and permanently sterilize the cash.
With International Monetary Fund program requiring the central bank to collect reserves, a switch to peg is expected to happen shortly. (Colombo/Apr27/2018)