Sri Lanka rupee volatility ‘overreaction’, fundamentals strong: CB Governor

Feb 14, 2012 (LBO) – A steady weakening of the rupee following a float was an ‘overreaction’ which will correct itself when market fundamentals begin to act, Central Bank Governor Nivard Cabraal said. “We have a clear policy that we will intervene only in the case of oil bills,” Governor Cabraal said calmly.

“I see this as an adjustment. It will adjust towards the rate that was prevailing when the market fundamentals are realized by people. This is an overreaction.”

The rupee was quoted as low as 118.80/119.20 Tuesday in the third day of free floating.

The Central Bank raised policy rates by 50 basis points before the float and also put limits on credit by commercial banks, which is a key driver of pressure on the exchange rate.

Petroleum prices were also raised, which is expected to not only reduce demand for petroleum itself but also extinguish aggregate demand (purchasing power) in the economy when users forego other spending to continue to buy petroleum.

Power prices are expected to be raised soon, which will further kill aggregate demand.

.