Sri Lanka forex markets paralyzed

June 25, 2012 (LBO) – Sri Lanka’s interbank forex markets were paralyzed Monday with no active trading by late morning following heavy moral suasion by monetary authorities over deals made in the previous week, dealers said. The rupee was tentatively quoted around 133.15/40 but there were no firm bids, dealers said after regulators questioned some deals made last week.

Sri Lanka’s rupee has fallen from 110 to 133 rupees over the past year amid sterilized foreign exchange sales.

Analysts have urged the central bank not to sterilize foreign exchange sales with large volumes of printed money and not to make unsterilized foreign exchange purchases where large volumes of liquidity is allowed to run loose.

Under a floating rate, the exchange rate can dip down when daily demand changes, especially because overnight open positions of banks have been cut.

However analysts say unless sterilized sales of foreign exchange are carried out, which ‘validate’ such falls, the exchange rate can float up again the following day.

The central bank has kept liquidity levels tight over the past two weeks though it is still auctioning liquidity at below the announced policy rate of 9.75 percent.

On June 22, money was auctioned at 9.58 percent after draining liquidity at 8.58 earlier in the month. For most of May there was more than 20 billion rupees of excess liquidity in the interbank markets.

The International Monetary Fund has also asked the central bank to watch out for liquidity created by swaps.

There have been concerns from February following a partial float of the currency that continued liquidity injections would tend to make the rupee a ‘crawling peg’.

Corrected-two way quote 133.15/40