Sri Lanka rupee weakens; money rates ease

March 13 (LBO) – The rupee closed lower against the dollar but overnight call money rates came down from the previous day’s highs to around 16 to 18 percent on Tuesday dealers said.

The government is expecting the proceeds of a 215 million dollar bond issue later this week.

Updated-highest call rate/correction dollar rupee Call rates peaked at 23 percent before coming down to lows of 15 percent in a day that ended with the market largely square.

In forex markets, the rupee fell to 109.65 to the US dollar in early trading and settled at 109.60 later in the day with a state bank driving demand, dealers said.

The rupee weakened to 109.50 against the greenback in late trading Monday, after opening stronger around 109.10 in the morning.

In March, demand for dollars usually goes up ahead of imports for the Sinhala and Tamil New Year in April, but economists have also warned that the Sri Lanka rupee is overvalued due to recent high inflation.

In December the rupee went through a correction but it is still overvalued by 13.7 percent according to the Real Effective Exchange Rate (REER) index, which measures inflation differentials between Sri Lanka and her trading partners.

In 2006 the rupee came under pressure from excessive money printing, and official capital flows were used to prop it up until the correction later in the year.

Though monetary policy has since been tightened, analysts say the inflation overhang is persisting.

Despite the correction in December, the REER went up from 111.2 in November to 113.7 in January with inflation peaking at 20.5 percent.

An index number of below 100 shows that a currency is undervalued and therefore helping exports, while an index number above 100 indicates a currency may be overvalued.

An index number above 105 is considered significantly harmful to export competitiveness.

Meanwhile the government cancelled the treasury bond auction Tuesday, rejecting all bids.