ECONOMYNEXT – Sri Lanka’s rupee strengthened to 140.60/70 to the US dollar in the spot forex market Tuesday after opening around 140.80/141.00 dealers said.
At one time the rupee strengthened to around 140.45/65 levels amid private bank selling.
Market participants say two private banks have been seen selling dollars in the spot market in recent days, though credibility of the peg has not yet been established to trigger large scale exporter conversions.
Sri Lanka’s central bank which is printing large volumes of money to buy government Treasuries had put severe pressure on the rupee, attempted to float the currency on September 04 when the rupee was at 134.75 to the US dollar without tightening monetary policy.
But analysts who track Sri Lanka’s monetary system closely say the float has not taken hold and there could be more than 300 million US dollars of reserve outflows since the attempted float.
A new peg seems to be developing around the 140-141 levels, analysts say.
In addition to printed money that is coming up for redemption in forex markets, capital flight has also been triggered. Ove the last three months about 180 billion rupees have been printed, though a part of it has been to accommodate capital flight.
Sri Lanka has a so-called soft-peg to the US dollar, where a central bank tries to target a currency peg and also prints money to target the interest rate, generating frequent balance of payments crises. (Colombo/Oct07/2015)