Sri Lanka rupee responding to policy measures: CB Governor

"It is as expected and as consistently maintained that there will be an appreciation, when the policy measures take effect," Cabraal said.

The rupee closed around 131.60/70 Friday to the US dollar after opening at 132.70/133.00 levels.

Earlier in the day money markets were tight with overnight repos spiking to 9.70 percent close to the policy rate of 9.75 percent while un-backed call money rose as much as 10.55 percent.

Excess liquidity of 9.1 billion rupees that was in the market a day earlier disappeared, indicating that a large foreign payment had been made by paying rupees to the Central Bank, in a mostly unsterilized sale.

The central bank injected 3.1 billion rupees to partially sterilize the forex sale at 9.56 percent, below the reverse repo rate of 9.75 percent.

If the money is only injected overnight the borrowing banks would be forced to collect deposit to clear the short reserve position, preventing any permanent pressure from building against the currency peg from newly created rupees.

A banking system cannot extend significant volumes of credit for long periods with just overnight funding from the central bank.

READER COMMENT(S)

3. Navin J Karunatilaka Jul 23

Nothing good ever comes from governments' involvement in markets whether its internal or external. The government should ensure that there is a balanced budget, low taxes, simple and unobtrusive yet effective regulation and drastically reduced spending.

All this is achieved by privatizing all non core businesses/ enterprises, closing down unproductive sectors, and reducing government sector employees whilst putting an end to non contributory pensions etc.,

2. MDS Jul 23

These links may also prove useful to those who search for the truth :

The Central Bank figures LBO uses+

http://www.oanda.com/currency/converter/ and choose LKR against the USD.

Let's find the real...!

1. MDS Jul 22

So...Exchange rate responding to policy measures, eh? Immediately after the CB gets confident of the 1B USD bond inflow, and the 415M USD IMF final tranche! My great grand aunt will be thrilled at the declaration, for sure! Is anybody wondering how the excess liquidity of 9.1B LKR (approx 69M USD) was mopped up overnight?

I get the distinct impression that we're not yet learnt our lessons. If we're splurged on the market using our forex reserves, just on this single day's fiasco, we're lost 2 LKR per USD= 138M LKR. Project for another few days, and the Greek Bond loss fiasco would be pea-nuts.

Since the 25th of June, for almost one month now, the LKR/USD rate has hovered in the 133/134 level. Wonder whether we are about to use the forex foolhardily to force the market to the 125 LKR/USD level to gratify our ego's? It would be good to remember that it took only 4 months of extravagances to decimate 25% of our reserves, just last year, causing the IMF to withhold the final 2 tranches! None of what was said is meant to deny the multi-faceted balancing act we’re to perform.

Neither is this a dig at the present rulers, but a pointing out of the dream-like stupor we appear to find it difficult to arouse ourselves out of. We consistently repeat our mistakes without learning.

As a finance professional, I cannot help recalling that the concerted efforts of the US Federal Reserve, Bank of Japan and the Bank of England (the Central Banks of those nations) , spending upward of 15B USD in the space of 2 hours to guide (make speculators stampede) the forex market back in 1998/6 and 1998/10 came to no avail, the effect thereof lasting less than 3 days. They have learnt their lessons, and mostly stay out of direct market interventions nowadays!

Do we, operating in a market with a volume less than a 100M USD per day delude ourselves that we are able to control markets?

Better to stand with feet on firm ground mates…and salutations to all dreamers! May sanity prevail !