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Sri Lanka rupee stronger in one week forwards, spreads narrow

ECONOMYNEXT – Sri Lanka’s rupee traded slightly stronger against the US dollar in the one week forward market Thursday while the spot market was mostly inactive dealers said.

The rupee was quoted around 192.50/193.00 to the US dollar in one week forwards, slightly stronger from 192.25/193.50 to the US dollars on Wednesday, dealers said.

The spread between buying and selling rates have narrowed over a few days as the central bank sold dollar in the spot market to keep the rupee around or below 195 to the US dollar and stop wildly erratic trading as excess liquidity soared in money markets.

Banks were quoting an average of 190.42 to the US dollar to buy telegraphic transfers on Wednesday and were selling at 195.82, or a spread of over 5 rupees, central bank data showed.

A week earlier on April 23, banks were quoting around 191.7 to buy TTs and were selling around 198.20 or a spread of under 7 rupees.

Sri Lanka’s central bank generally intervenes to stop the rupee appreciation and build reserves but does not intervene always after printing money or cutting rates, making the rupee the worst currency in South Asia.

Unless liquidity injection or money printing is followed by interventions, the rupees’s soft-peg with the US dollar will break, especially if credit demand is strong.

Under an IMF program the central bank operated a so-called one-sided disorderly market conditions (DMC) rule where liquidity was injected and the rupee was allowed to fall steeply leading to a loss of credibility of the peg where exporters held back and importers covered as fast as possible.

Before the most recent liquidity injections the peg was around 182, to the US dollar (Colombo/Apr30/2020)





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