Sri Lanka rupee weakens in volatile trade

Mar 27, 2009 (LBO) – Sri Lanka rupee fell to 115.35/50 levels against the greenback in intra-day trading Friday with heavy buying from foreign banks while the monetary authority briefly took the foot off peg defence, dealers said. The rupee hit a low of 115.75 against the greenback when peg defence was eased amidst heavy buying from state banks earlier this year. But peg defence resumed at 114.25 rupees later.

The bank’s monetary reserves fell to about 1,142 million US dollars in January according to published data, while gross reserves of the country which includes fiscal reserve were about 1,482 million US dollars in the same month.

Dealers say Friday’s volatility was partly due to the sale of a 1.9 billion rupee stock sale in listed John Keells Holdings by a foreign investor to a local buyer this week.

A state bank that usually represents the Central Bank has been in the market offering dollars to defend a peg at 114.25 rupee levels.

The rupee also fell below the peg defence level on Thursday.

An International Monetary Fund team is in Sri Lanka to discuss a bailout package. IMF packages are usually conditional on abandoning peg defence if the country does not have the institutional capacity to support a peg.

“We don’t have any date as to the conclusion of those discussions or their likely bringing to the IMF Board, and we don’t have any information yet on how much Sri Lanka will be requiring from the Fund,” Caroline Atkinson, head of the external relations department told reporters Thursday responding to a question from LBO.

The rupee opened at 114.35/50 levels Friday and closed around 114.80/115.20 rupees after spiking to 115.35/50 levels, dealers said.

It is not known whether the monetary authority has only temporarily withdrawn from peg defence or it is allowing the currency to be more flexible ahead of an IMF bailout.

A flexible currency is needed to break a peg defence cycle and end foreign reserve losses by the Central Bank.