Dec 10, 2007 (LBO) – The Sri Lanka rupee came down from early highs of 108.10/20 against the greenback to lows of 109.50 in spot trade Monday showing unusual intra-day volatility, dealers said. Sri Lanka’s forex markets are not used to high levels of volatility as the Central Bank plays a market maker role to keep the rupee trading within a tight band.
On Monday the local currency stabilized from lows of 109.50 to around 109.00 after a state name that usually represent the monetary authority sold dollars.
Exporters dumped dollars last week fearing a ‘carry trade’ style hit on the rupee by speculative foreign capital after authorities lifted foreign investor limits on high yield Sri Lanka government bonds.
A government deal to delay about 90 million dollars worth oil payments to Iran a month may also have reduced importer demand for dollars, dealers said.
On Thursday excess liquidity jumped to 10.4 billion rupees in money markets on dollar conversions, while a record 170 million dollars in spot and forward transactions went through.
Sri Lanka’s central bank has been struggling to conduct effective monetary policy as consumer inflation in Colombo raged at 19.6 percent in November.
The country has not had an effective monetary policy regime to maintain price stability after a currency board arrangement was scrapped in 1951.
The Central Bank has been toying with quantity targeting in 2007, but it was tripped up by fiscal dominance, forcing it to loosen monetary policy midway through the year.
Capital inflows from government borrowing have also added to its woes.
Meanwhile the government last week introduced a new price index showing lower inflation which was claimed to be the ‘true’ inflation in the country.
In the secondary bond markets 12-month Treasury bills were quoted at 20.00/50 percent Monday while 3-month bills were quoted around 18.00/19.25 dealers said.
A five year bond maturing in April 2012 popular among foreign investors was quoted at 17.50-18.00 levels while 2009 bonds were quoted around 18.59/19.50, dealers said.
Meanwhile stocks closed a slight 0.2 percent down with the All Share Index at 2508.8 after losing 5 points. The Milanka index was down 0.47 percent at 3,284.09 after losing 15.6 points.