Sri Lanka rupee strengthens as credit weakens

Mar 29, 2012 (LBO) – Sri Lanka’s rupee closed at 127.75/85 against the US dollar after opening at 129.30/40 dealers said, with data indicating that a credit bubble which put pressure on the peg is breaking. Rupee liquidity from dollar purchases has risen from 6.7 billion rupees on March 14 to 26 billion rupees by March 29.

Sri Lanka’s rupee came under pressure from high credit growth in mid-2011 but monetary tightening, raising fuel prices to reduce state credit demand and a rapid of a dollar peg has cut domestic demand.

The Central Bank’s Treasury bill stock which is indicative of the volume of money printed into the banking sector to accommodate credit has fallen from a peak of 259 billion rupees on March 09 to 209 billion rupees by March 29.

Excess liquidity has remained in the banking system from March 14 indicating that rupee proceeds purchased from dollar inflows are no longer being instantly loaned out as credit.

The Central Bank also conducted a term auction to drain liquidity.