Mar 10, 2008 (LBO) – Sri Lanka rupee gained against the greenback in early trading Monday with state names coming in to cap the domestic currency at 107.50/55 levels while exporters scrambled to sell forward, dealers said. Authorities have been holding the rupee at around 107.70/80 levels in the first two months of 2007, but on Monday the rupee spiked to 107.45/50 levels amidst active foreign selling, before state banks intervened to buy dollars.
The rupee closed at 107.65/72 against the dollar Friday again with official intervention to prevent upward pressure after an intra-day spike to 107.50 levels.
Analysts say a sell down of central bank domestic assets and a partially closed discount window had tightened a peg with the US dollar, with the mopping up of externally generated liquidity pushing the rupee up keeping the monetary system tight.
Central Bank holdings of treasury bill are now down to 10 billion rupees.
Exporters were selling 3-month dollars forward at 110.23/30 rupees.
In the past exporters were reluctant to sell forward and banks offered forward cover to importers by charging the difference between rupee and dollar interest rates, which was the cost of borrowing and holding dollars to cover a forward sale.
But with exporters now selling forward actively forward premiums have plummeted. Analysts say 3-month dollars at 110.20 rupees indicates a rupee interest rate of about 13 percent compared to a market term money rate of around 19.00 percent.
Six month dollars were quoted at 113.25/35 in the market and 12-month forwards much wider at 118.50/119.10 rupees.
But this also allows dealers to play the swap market.
Sri Lanka’s exporters have been feeling the pinch with last year’s inflation hitting 20 percent after the central bank’s monetary program went off track in the second half of the year with the bank eventually printing 45 billion rupees.
The US dollar has also taken a beating in international markets with the Federal Reserve printing money to push rates down, while major central banks, including the European Central Bank and the Reserve Bank of Australia maintaining tight monetary policy.
The US dollar has fallen against a number of developing country currencies including that of India, unsettling exporters.
“The rupee has been made reasonably stable,” Central Bank governor Cabraal said two weeks ago.
“It has not appreciated as much as India, but nevertheless we do not know whether it is such a good thing to have so much of an increase immediately,” he added, acknowledging the dilemma facing the monetary authority.
If the central bank wants to ease upward pressure on the rupee, analysts say it may have to permit higher levels of liquidity in the banking system. But the monetary authority is wary of fueling inflation with 12-month prices already at 21.6 percent in February.
US rates cuts have also fueled a record commodity boom with inflation hitting a high of 4.6 percent in January.