Sri Lanka rupee weaker, rates steady

May 29, 2012 (LBO) – Sri Lanka’s rupee was quoted weaker around 131.40/50 to the US dollar in the spot market Tuesday while bond yields were flat from a day earlier, dealers said. The rupee has weakened from around 129 rupees to current levels the US dollar over the past three weeks as rupee liquidity levels remained high particularly after a large unsterilized dollar purchase.

Analysts has said the Central Bank should quickly mop up excess liquidity in the banking system by outright sales of its Treasuries holdings to lock up foreign reserves, to prevent the rupee peg coming under pressure from unsterilized dollar purchases.

LBO’s economics columnist fuss-budget has warned that if the unsterilized dollar purchases continue with no matching unsterilized dollar sales, the rupee would weaken.

If foreign exchange is given for oil payments via sterilized sales also the rupee would weaken, making the rupee a slowly weakening ‘crawling peg’.

If liquidity is aggressively mopped the rupee could be strengthened as interest rate movement in government securities markets seem to indicate that credit pressure is not as great as it was earlier in the year.

Three month bills were bid at around 11.10 percent with no offers and 6-month bills at around 12.10 percent with no offers.

On Tuesday a 2-year bond maturing on March 01, 2014 was quoted around 13.10/20 percent, the same as a day earlier, but about 10/15 basis points higher from Friday, dealers said.

A 3-year bond was quoted around 13.65/75 percent this week to yield slightly higher from 13.50/65 percent levels last week.