Sri Lanka rupee tumbles in forward trade amid money printing

ECONOMYNEXT – Sri Lanka’s rupee traded at 144.15 in the spot next market (settlement in three days) hitting a new low against the greenback dealers said, as the Central Bank printed tens of billions of rupees to keep interest rates down.

In the spot market (settlement two days) the rupee was quoted at 143.95/144.10 against the US dollar, but there was no deals in early afternoon trade.

But the implied spot rate of a trade at 144.15 in the forward market is around 144.10 to the US dollar, indicating that the rupee has weakened below 144 to the US dollar.

In Sri Lanka dealers have a habit of trading in the spot next and several days ahead to escape the wrath of the central bank when it prints money, generates excess demand and weakens the currency.

On Tuesday the central bank rejected bids for a bond auction.

Last week the Central Bank had printed about 40 billion rupees, data showed.

The Central Bank cut policy rates in April 2015 firing a bubble in vehicle import credit and general consumption boom, with the budget also deteriorating.

On Monday the Central Bank sterilized cash for one month at an average yield of 6.42 percent after buying up longer tenor Treasuries to finance the budget deficit at lower rates earlier.

Though there are some expectations that the Central Bank may abandon its imprudent monetary policy and raise rates tomorrow, analysts say it will not help the currency if it continues to print money.

The Reserve Bank of Zimbabwe used to finance government salaries and cashflow deficits of state enterprises at rates between 0 and 50 percent and sterilize them for 900 percent, analysts say. (Colombo/Dec29/2015)

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