Sri Lanka rupee dips to 113.80

Dec 29, 2008 (LBO) – The Sri Lanka rupee dipped to a low of 113.80 against the greenback in spot trade Monday as it continued to adjust amidst excess liquidity in the inter bank market, dealers said. In late trading, the rupee steadied at 113.65/113.80 after opening at 112.95/113.15 levels.

Authorities announced a repo auction of seven billion rupees on Monday, dealers said.

On December 26, 10.1 billion rupees were parked in the Central Bank through the auction and repo window, though 3.3 billion rupees was also injected to the market, through the reverse repo window.

Overnight rates have now dropped to 13.00/14.00 percent levels.

Analysts say excess liquidity, and injections through the reverse repo discount window to accommodate customer withdrawals of banks, are likely to weaken the rupee.

During the East Asian crisis, lender of last resort support to a crumbling banking sector put severe pressure on the currency, leading to IMF advice to close banks. Similar patterns have been seen in Iceland.

Sri Lanka does not have a standard rate targeting reverse repo system, which is necessary to run a floating exchange rate effectively.

But the county has a 12.0 percent window with restricted access and a penal 19.0 percent discount window which can give monetary authorities more control over the currency.

Meanwhile the central bank’s Treasury bill stock rose to 136 billion which analysts say is an indication that a state foreign liability has been settled.