Sri Lanka central bank talks up rupee, as the currency comes under renewed pressure

October 15, 2006 (LBO) – Sri Lanka’s central bank is talking up the rupee ahead of market opening on Monday, as the currency came under heavy pressure, despite falling oil prices. Analysts estimate that the central bank has spent close to 150 million dollars in the past few weeks defending the rupee. The rupee floated towards 106 to the US dollar this week, after breaking the 105 rupee barrier just days before.

In a statement released after close of business Friday the central bank said the rupees depreciation was connected to an appreciation of the US dollar in international markets, in a move analysts said was an attempt to calm jittery markets.

“The US dollar appreciated by 1.1 per cent against the Euro, 1.2 per cent against the Yen, and 0.89 per cent against the Sterling Pound from end September 2006 to October 12, 2006,” the Central Bank said.

“In that context, Sri Lanka rupee also depreciated by 1.22 per cent against the US dollar over the same period.”

The statement said the Sri Lankan rupee had appreciated against the Yen (0.33 per cent) and Euro (0.14 percent) and compared with the end 2004 rate, has only depreciated against the US dollar by 0.7 per cent.

After falling sharply in the face of massive money printing and inflation in 2004, the rupee appreciated in early 2005 as post tsunami aid flows boosted the balance of payments.

Since the tsunami the rupee has appreciated against other major currencies such as Euro (7.4 per cent), Yen (15.1 per cent) and Sterling Pound (2.7 per cent).

Analysts had warned that continuing inflation was making the rupee overvalued, and exports would suffer, while continuing money printing this year, and a reluctance to tighten monetary policy will put further pressure on the exchange rate.

However Central Bank says exports performance has been good in August with the country earning 734 million dollars.

“The expenditure on imports increased substantially due to high petroleum imports as well as motor vehicles and other consumer imports with the rising income levels of Sri Lankans,” the statement said.

“The Central Bank has allowed the market forces to determine the exchange rate since 2001, and has been intervening only to mitigate excessive volatility in the foreign exchange market.”