July 20, 2012 (LBO) – Sri Lanka’s exchange rate is responding to policy measures taken earlier in the year, Central Bank governor Nivard Cabraal said, as the rupee rose sharply against the US dollar Friday. The central bank injected 3.1 billion rupees to partially sterilize the forex sale at 9.56 percent, below the reverse repo rate of 9.75 percent.
If the money is only injected overnight the borrowing banks would be forced to collect deposit to clear the short reserve position, preventing any permanent pressure from building against the currency peg from newly created rupees.
A banking system cannot extend significant volumes of credit for long periods with just overnight funding from the central bank.
“It is as expected and as consistently maintained that there will be an appreciation, when the policy measures take effect,” Cabraal said.
The rupee closed around 131.60/70 Friday to the US dollar after opening at 132.70/133.00 levels.
Earlier in the day money markets were tight with overnight repos spiking to 9.70 percent close to the policy rate of 9.75 percent while un-backed call money rose as much as 10.55 percent.
Excess liquidity of 9.1 billion rupees that was in the market a day earlier disappeared, indicating that a large foreign payment had been made by paying rupees to the Central Bank, in a mostly unsterilized sale.