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Sri Lanka rupee in restricted trade, money rates higher

COLOMBO (EconomyNext) – Sri Lanka’s rupee continued to trade under tight restrictions and moral suasion with the spot US dollar nominally quoted at 132.80/133.00 rupees, while overnight money was elevated, dealers said.

In the spot market no deal are taking place above 132.80 to the US dollar, and forward deals have been effectively restricted to 2 cents a day from an earlier 5 cents, with banks facing the threat of deals being reversed by the regulator.

As a result one week forwards have been limited to 132.94 rupees, above which dealers are not allowed to trade.

When restrictions are placed, it is usual for exporters to hold back dollars and importers to pay up early creating a bigger imbalance than normal in the inflows and outflows of foreign exchange.

The rupee has been coming under pressure from a hundreds of billions of temporarily sterilized liquidity as credit growth picked up which require unsterilized interventions by the Central Bank to mop up liquidity at the cost of foreign reserves.

Analysts had been warning for several months that all the foreign reserves backing the excess liquidity will eventually flow out of the country unless they were permanently sterilized or mopped up for long periods through central bank securities.

(Sri Lanka may lose forex reserve beauty contest amid ultra-low interest rates)

Temporarily sterilized excess liquidity has fallen to 289.9 billion rupees by the end of the first week of February from around 350 billion rupees in November, before credit growth started to pick up.

But from February steep state salary increases and petroleum price cuts will also add additional demand to the economy and put more pressure on the banking system, requiring higher interest rates to be paid on government Treasury bills.

In January the state also paid back a 500 million dollar bond without going to the market to roll it over.

Up to February 09, overnight money market rates were hitting 6.5 percent, something that only happened in the first three days of the month after restrictions were placed on parking excess funds in the standing window.

After the first three or four days overnight rates were in the 5.80 percent range.

There was also a borrowing of 4.0 billion rupees from the Central Bank’s liquidity injection window, a rare occurrence with tens of billions of dollars still sterilized through short term measures.