"Getting involved either way - to devalue or to keep the value - I think we must not intervene in a big way."
An International Monetary Fund team is now in Sri Lanka in part to discuss a 2.5 billion US dollar bailout it gave in May 2009.
The lender suspended the program last August amid strong peg defence, advising Sri Lanka to be more flexible in its exchange rate management.
Sri Lanka created a soft-pegged exchange rate in 1950 as part of the Bretton Woods system of unstable pegs, which has created forex shortages and full-blown balance of payments crisis since then.
Unlike a hard peg or currency board, which Sri Lanka had from 1885 to 1950 a soft peg breaks because the monetary authority tries to control both the exchange rate and the interest rate by printing fresh money simultaneously.
The Bretton Woods system itself collapsed in 1971-73 firing a commodity bubble including an 'oil shock' as the US defaulted on its obligation to defend a peg at 35 US dollars an ounce amid excessive money printing during the Vietnam War.Advanced nations moved to floating exchange rates and countries like Singapore moved back to a currency board, but Sri Lanka persisted with the soft peg. In the 1970s Sri Lanka imposed trade and exchange controls and engaged in import substitution.
Treasury Secretary P B Jayasundera said oil prices were high and there was sluggish global recovery and each country had to manage their problems.
"I hope as we managed in 2008/9 we can address the current situation," he said.
The International Monetary Fund gave a 2.5 billion US dollar bailout after the rupee was floated in April 2009.
A 'float' breaks a cycle of intervention and liquidity injections made to sterilize or offset rupee losses from dollar sales.
The IMF suspended the program, holding back the last two tranches as peg defence became excessive after July 2011.
Jayasundera said food production would be increased in an 'import replacement' drive to help the exchange rate.
