April 23, 2009 (LBO) – The Sri Lanka rupee weakened below the psychological 120.00 level against the US dollar in spot trade to 120.80 before recovering, as the local currency continued float freely, dealers said.
The rupee fall come amidst a collapse in import volumes and an unprecedented contraction in the trade deficit.
The rupee closed at 119.90/120.10, dealers said. The rupee strengthened to 120.00 sharp levels in intra-day trade before settling around 120.20/50 in afternoon trade.
The rupee adjustment came as the central bank said an International Monetary Fund (IMF) deal was imminent and staff level agreement was reached.
A float of the rupee is a prior action for an IMF bailout.
The rupee is adjusting to a new level to make up for sterilized intervention activities (simultaneous interventions in foreign exchange and money markets by a central bank to defend a peg) that began in September 2008.
Since then the Central Bank has injected more than 200 billion rupees in new liquidity (printed money) and lost around two billion dollars in foreign reserves.