Sri Lanka tightens rules on car imports amid currency pressure

Aug 30, 2013 (LBO) – Sri Lanka has imposed a 100 percent cash margin on letters of credit to import cars to slow the imports of cars, the Central Bank said as the rupee came under pressure in forex markets. The central bank said currencies of several trading partners have weakened against the Sri Lanka rupees as both the Indian rupee and the Japanese yen fell.

“As a consequence, there has been a growing possibility that the importation of motor vehicles into Sri Lanka could accelerate in the period ahead,” the monetary authority said in a statement.

“The Central Bank believes that this trend should not be allowed to continue without a suitable response.”

The Sri Lanka rupee fell to a low of around 135 rupees in forex markets this week for leading to interventions by the Central Bank.

Bond yields also rose indicating some selling of gilts by foreign investors.

Sustained interventions by a central bank in currency markets which are followed by liquidity injections to sterilize the sales can result in rapid depreciation and reserve losses, as has happened in India.

In order to keep a currency stable, interventions have to be unsterilized and interest rates have to be allowed to go up.

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