June 11, 2013 (LBO) – Sri Lanka’s rupee weakened below 127 to the US dollar in the spot market in mid morning trade Tuesday, amid excess liquidity, dealers said. Sri Lanka has a loose peg with the US dollar and has tended to intervene when the exchange rate weakens below 127.00.
Many Asian currencies which operate close to floating rates have weakened in the past few months as the US dollar tended to strengthen.
The India rupee has also weakened to a record 58 to the US dollar this week.
Sri Lanka’s rupee fell from 110 to 134 to the US dollar due to sterilized foreign exchange sales in 2011/2012 and has since strengthened amid sterilized forex purchases. The spot US dollars weakened as much as 127.10/15 to the US dollar from levels of around 126.50 seen Friday.
In late April the Central Bank sold down its Treasury bill stock on a net basis, an action that drain rupee reserves from the banking system and reduces credit and import demand.
In May liquidity a term repo auction also locked up liquidity temporarily, which was unwound on May 31.
The bill stock has also climbed slightly in the period.
The Central Bank has been encouraging greater domestic credit to boost economic activity.