Sri Lanka central bank puts curbs on forex market

Oct 06, 2008 (LBO) – Sri Lanka’ central bank has tightened limits on overnight trading positions of commercial banks, imposed penal interest rates on exporter financing and raised deposit limits on import letters of credit, officials said. The rules were last used in 2001 when Sri Lanka floated the rupee following currency crisis created by a bout of sterilized intervention in forex markets.

Credit given to exporter would be slapped with a 1000 basis point penal interest rate if they are not settled after three months and 200 basis points after every 30 days, officials said.

Cash deposit requirements for letters of credit to import cars have been raised to 200 percent.

Restrictions have also been place on forward exchange trading, dealers said.

Sri Lanka rupee traded at 110.0/110.50 levels Friday with some intervention by the central bank, up 2.00 rupees from two days ago.

Sri Lanka’s central bank lost 800 million dollars over the past two months in trying to maintain a peg and injected around 70 billion rupees of printed money into the system.

To tighten the system and dissipate the demand pressure from the system, the currency has to depreciate a little.

Some exporters have also cut forward bookings at large losses to themselves, dealers said.