October 19, 2006 (LBO) – The Sri Lankan rupee closed stronger at 105.70 against the U.S. dollar Thursday, gaining more than a rupee and shaking off losses made earlier in the week, dealers said. Dealers believe extra dollars flowed through a portfolio investment, and state banks which are usually on the buying side also stayed in the sidelines.
The rupee also gained Wednesday through a suicide attack on a Southern port town by the Tamil Tigers from a low of 107.80.
The central bank rapped dealers earlier in the week saying ‘excessive speculation’ was taking place in foreign exchange markets.
Dealers say the Central Bank was calling market players today to discourage speculative activity and cut long positions.
The Bank said in a statement Tuesday that the government was raising 150 million dollars through a syndicated loan, which will boost the capital account.
The bank also said reserves at 2.4 billion dollars were down to three months of imports.
Analysts says loose monetary policy has been putting pressure on the rupee and low interest rates have also made in easier for dealers to speculate in the forward markets.
This week average yields on government treasury bills went up by more than 60 basis points which analysts say is an unannounced but welcome tightening of policy, which will help both in stabilizing the exchange rate and containing inflation.
However the monetary authority is still extending credit to government with the central bank held T-bill stock now climbing to 64 billion rupees, which analysts say is likely to put further pressure on the rupee.
Analysts say the rupee is overvalued on a real effective exchange rate and depreciation is needed to restore export competitiveness.