COLOMBO (EconomyNext) – Sri Lanka’s rupee strengthened in the forward market amid continued sales in the spot market by a state bank Wednesday which had also kindled some trading, dealers said.
Three months forward dollars were quoted at 135.80/136.20 rupees in late afternoon trade, stronger than the 136.50/80 levels seen at opening.
A state bank which usually act for the monetary authority was selling dollars at 133.90 rupees in the spot market, dealers said.
State banks began selling dollars Monday after the sale of a 650 million dollar sovereign bond, and a floating rate bond sold by the government mainly in the domestic market.
On Monday penalty interest rates for exporters who borrow rupees for more than three months were also imposed, but there is still no active exporter selling, dealers said.
The central bank also killed some liquidity on Monday, data showed.
Sri Lanka’s Central Bank put the rupee under pressure by releasing large volumes of cash into the market and over the past few months but failed to sell dollars, when the rupees came up for redemption in the forex market as state and private credit picked up.
Instead controls were put on trading, undermining the credibility of the dollar peg.
The Central Bank has a strong 60-year record of following contradictory monetary and exchange rate policies, undermining the credibility of the peg, and eventually also triggering full scale balance of payments crisis, critics have said.
Some analysts have also called for the abolition of the soft-pegged Central Bank and advocated a return to a hard peg to safeguard the poor and economic stability.
Analysts who watch the Central Bank however say in May, liquidity levels appeared to be stable, indicating that either credit or consumption had eased. Strong rainfall usually helps reduce fuel imports.
In June however another state salary increment is due, which will push consumption up, though political uncertainty may reduce private credit, analysts say.