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Sri Lanka rupee strengthens in one week forwards against US dollar, spot seen

ECONOMYNEXT – Sri Lanka’s rupee strengthened to 187.50/188.00 to the US dollar on Thursday from around 189.00/189.50 to the US dollar in the one week forward market, while some spot trades were also seen dealers said.

One week’s were quoted as strong as 186.15/60 to the US dollar in intra-day trade, before weakening towards close, dealers said.

Sri Lanka’s economic activity and consumption has declined in amid Coronavirus curfews.

Sri Lanka’s central bank printed large volumes of money and did not initially intervene as excess liquidity pressured the rupee and importers tried to cover their bills hurriedly.

Any pegged central bank that prints money (injects liquidity with the acquisition of domestic assets) would pressure the peg, even if private credit is weak.

Sri Lanka’s economy had become highly vulnerable to monetary instability after the central bank started to target a call money rate with excess liquidity, losing all control of the monetary base, analysts have pointed out.

The loss of control of the monetary base coupled with a so-called ‘disorderly market conditions (DMC)’ where interventions are delayed until market participants are in full panic and the credibility of the peg is lost.

Restoring the credibility of the peg requires consumption collapses and output shocks.

Unless the rupee is allowed to appreciate as consumption and credit collapses, stagflation as well expansions of the national debt, chronically higher interest rates will result.

The central bank in the past has been quick to stop the appreciation of the rupee, as consumption collapses after currency collapse.

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Banks which are short borrowed 20.3 billion rupee from the central bank’s overnight widow at 7.0 percent though excess banks deposited 162 billion rupees in the central bank, indicating counter party risks.

Liquidty in the overnight money market was 155.19 billion rupees up from 142.50 billion rupees.

Banks deposited 165.93 billion rupees in central bank’s excess liquidity window.

In the secondary government securities market, bond yields eased in moderate trading with liquidity centered on 2024 maturities, dealers said.

A bond maturing on 15.12.2021 closed at 7.25/40 percent down from 7.30/45 percent from Tuesday.

A 2-year bond maturing on 01.10.2022 closed at 7.95/8.03 percent down from 7.98/8.02 percent at yesterday’s close.

A bond maturing on 01.09.2023 closed at 8.30/40 percent down from 8.25/35 percent.

A bond maturing on 15.09.2024 closed at 8.72/75 percent on Wednesday up from 8.70/75 percent Tuesday.

A bond maturing on 15.10.2027 closed at 9.00/9.04, unchanged from 9.00/9.08 on Tuesday. (Colombo/May06/2020)

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