Sri Lanka rupee trades weaker

Feb 27, 2012 (LBO) – Sri Lanka rupee was quoted as low as 121.05/121.25 levels against the spot US dollar in intra-day trade Monday after opening at around Friday’s close of 119.90/120.20 dealers said. Analysts have called for rates to be allowed to move up, to keep the exchange rate steady.

Update II Under a floating rate, however an exchange rate can move down as well as up. The rupee has strengthened as much 118 to the US dollar after market interventions were stopped.

The rupee came under pressure from strong credit growth in mid 2011 from the private sector as well as a sudden spike in state credit and the rupee was partially floated in February.

In the year to December credit to private business rose 34.5 percent 2,005 billion dollars, credit to state enterprise, particularly energy utilities, rose 37.3 percent to 198.5 billion rupees. The state has since raised prices.

The Central Bank has said it will continue to intervene ‘off-market’ to give dollars to settle oil bills.

But if such settlements are sterilized with liquidity injections, will create conditions for a ‘crawling peg’ with the rupee forced down steadily to account for the imbalance in demand pressure created by the injections, analysts say.

Interventions began around 110 rupees to the dollar.

Interest rates have also risen. The 3-month Treasury bill yield rose up 252 basis points to 9.51 percent on February 24, from a year earlier and the 12-month yield rose 2.86 percent to 10.19 percent.

The active policy rate also shifted from the 7.0 percent repo to the 8.50 percent reverse repo after forex market interventions created liquidity shortages. The policy rate was hiked 50 basis points to 9.00 percent in February.