July 09, 2013 (LBO) – Sri Lanka’s forex markets continued to trade in the spot-next market where settlement is three days ahead, with the spot market remaining dry for the second day running and interbank liquidity high, dealers said. In the spot market, where deals are settled two days later there were no quotes amid fears of moral suasion but an indicative wide quote of 130.60/131.10 to the US dollar was mentioned.
In the spot next market the US dollar was quoted as weak as 131.00/05 rupees and 130.96.131.00 in afternoon trade, dealers said.
Liquidity in interbank markets was high at 34 billion rupees, which has not been sterilized with securities sell-downs by the Central Bank. The market was flooded with liquidity after the Central Bank cut the reserve ratio by 200 basis points on July 01.
On Monday about 13 million US dollars spot deals had been reported, most of which could be accounted for by official sales, dealers said.
Dollar sales by the Central Bank that mop up excess liquidity (unsterilized sales) prevent future exchange pressure and credit.
On Tuesday, sales by a state lender that usually acts for the monetary authority was seen selling in the spot-next market, dealers said.
The Indian rupee also fell to a record low on Tuesday, amid sterilized forex sales. Sterilized foreign sales however create fresh demand, creating vicious cycle of intervention and depreciation.
Net Reserve Bank of India credit to government rose from 6,451 billion rupees from May 31 to 6,784 billion rupees by June 28, RBI data showed.
India imposed similar restrictions earlier seen in Sri Lanka on forex trading today.
The Sri Lanka rupee started to weaken last month partly due to exits by some foreign investors.
From last week the Central Bank also stopped giving a separate breakdown for foreign investor held bills and bonds. Total holdings were steady at around 494 billion rupees in the week ending July 03, official data showed.
Before 2008, all of Sri Lanka forex troubles have been caused by sterilized forex sales or monetization of government debt, and foreign bond holders were not a factor.