Sri Lanka rupee strengthens in early trade

Jan 09, 2013 (LBO) – Sri Lanka’s rupee gained about against the US dollar in mid morning trade Wednesday to 126.25/55 levels in the spot market on expectations of foreign purchases of rupee bonds, dealers said.

Sri Lanka’s rupee has strengthened from lows of 134 to the US dollar in mid 2012 following a float of the currency in February and appreciated to 127 levels in December.

The rupee again weakened after term auctions of liquidity amounting to almost 5 percent of the monetary base around October 2012.

A currency peg tends to weaken when foreign exchange sales are sterilized with fresh liquidity, strengthens when foreign exchange purchases are sterilized by withdrawals or liquidity and remain steady when interventions are unsterilized.

Over the past few weeks the Treasuries stock of the Central Bank has come down steeply to about 145 billion rupees from about 210 billion rupees in early December partly due to off-setting a central bank profit transfer.

The rupee opened around 127.00/25 levels to the US dollar after closing at 127.15/20 levels Tuesday.

Dealers said there was dollar selling on expectations of foreign investor purchases in a bond auction Thursday where 40 billion rupees of gilts are on offer.

Market participants expect strong foreign interest up to 20 billion rupees at the auction.

Large official inflows usually do not help prop up the exchange rate as the Central Bank tends to buy them and create rupee liquidity instead of allowing the dollars to hit the forex market and appreciate the currency peg.

Any liquidity that is created is then not always mopped up by outright sales of Treasury bills.

Analysts have identified the action as one of reasons that Sri Lanka finds it difficult to recover once the monetary system enters so-called ‘balance of payments crisis’ and also for chronic currency weakness and inflation despite relatively high policy interest rates.