Sri Lanka rupee pressured, liquidity tightens

Sept 13, 2011 (LBO) – Sri Lanka’s rupee continued to be pressured in forex markets with the spot dollar held at 110.10 rupees with forex sales by authorities Tuesday, dealers said, while liquidity tightened despite fresh injections. Excess liquidity in the interbank market fell to 27.6 billion rupees Tuesday from 31.4 billion rupees a day earlier, despite the central bank’s T-bill stock climbing to 23.6 billion rupees from 19.8 billion rupees a day earlier.

Sri Lanka’s central bank started fully fledged sterilized interventions at the end of last week signaling a new phase in the country’s balance of payments troubles.

The central bank’s rising domestic asset portfolio (T-bills) reflect the expansionary ‘sterilization’ or liquidity injections made in money markets to offset the effects of forex interventions. Liquidity injections are made to keep interest rates from moving up due to rupees that are bought by the central bank to sell dollars into the market.

Analysts say continued defense of the dollar peg at 110.00 rupees will eventually make it difficult for the central bank to control rates.

The International Monetary Fund has warned Sri Lanka to cease interventions in forex markets allow the rupee to weaken to prevent a worsening balance of payments crisis.