Dec 10, 2008 (LBO) – The Sri Lanka rupee slipped to 110.65/75 against the greenback on Wednesday from 110.30 two days earlier, but the central bank is continuing to intervene at the new rate, dealers said. The Sri Lanka rupee had come under severe pressure from central bank liquidity injections to maintain reserve money, following interventions to preserve a dollar peg, in a process known as ‘sterilized intervention.’
A central bank cannot maintain a peg with an anchor currency and target the domestic monetary base or interest rates by printing money simultaneously without causing a currency crisis unless exchange controls are imposed and foreign trade is also restricted.
The phenomenon is generally recognized in economics as the ‘impossible trinity’ of monetary policy.
Dealers said the central bank was now intervening at the new rate of 110.65 rupees to the dollar.
Dollars are only being offered for genuine trade transactions with authorities inquiring about letters of credit numbers, dealers said.
Since the beginning of the intervention the central bank had pumped in more than 110 billion fresh rupees to the market and cut the statutory reserve ratio twice adding more than 24 billion rupees (1250 US dollars).
In early September before the intervention-and-liquidity injection cycle began, Sri Lanka had 3.5 billion dollars in foreign exchange reserves.
To break the cycle, the currency has to be ‘floated’.
The International Monetary Fund has also urged Sri Lanka to abandon what it called its ‘de facto’ dollar peg.