Sri Lanka rupee trades with no intervention

Feb 09, 2012 (LBO) – Sri Lanka’s rupee recovered to close around 115.20/30 against the US dollar in the spot market after weakening as much as 115.70 in intra-day trade immediately after the central bank stopped interventions, dealers said. The rupee was pegged to the US dollar at 114.30 on Tuesday and after announcing a new peg at 114.60 rupees Thursday, the Central Bank stayed out of the market allowing it to float freely for some time.

The International Monetary Fund has called for the currency peg to be ‘more flexible’. The central bank lost more than a quarter of its forex reserves in sterilized interventions since July 2011.

Sri Lanka rupee has come under pressure from strong credit growth and liquidity injected by the Central Bank to sterilize interventions in forex markets.

Ending sterilized interventions will remove a key downward pressure on the currency.

Dealers said some importers held back, after the rupee slid and the market is yet to come into full equilibrium.

The central bank removed its intervention band Thursday after re-pegging the currency at increasingly lower levels over three working days.

Central Bank governor Nivard Cabraal said the monetary authority would not intervene to keep a specific price but would continue to supply dollars to meet oil import bills from time to time.