Sri Lanka forex market steady with intervention

Oct 03, 2008 (LBO) – Sri Lanka’s forex markets entered a second day of intervention with a state bank that usually acts for the monetary authority selling dollars at 108.00 rupees, dealers said. Central Bank governor Nivard Cabraal told LBO that the state bank “could continue to sell” if required.

On Thursday the forex market went into limbo with the state name dominating the selling side and with a 108.00 rupees to the dollar quote in the market both ways.

On Friday the market started off with a 107.95/108.05 two-way quote but intervention through a state bank resumed with a second day of the rupee at 108.00 to the US dollar.

Meanwhile the one month forward premium for the US dollar which had spiked to around 85 cents had declined to 65 cents, dealers said.

From the beginning of the year the central bank had maintained a peg of 107.80 to the US dollar with tight monetary policy. Over the last two weeks it slipped to 107.90 and on Tuesday it spiked to 108.35 before heavy state intervention brought it down.

The central bank continued to pump liquidity into the system to make up for forex outflows.

By routing such sterilization activities through the reserves of the commercial banking system analysts say the central banks is endangering its own reserves and ability to control inflation.

By Thursday the central bank’s Treasury bill stock had climbed up to 26 billion rupees indicating a loss of foreign reserves of around 240 million dollars.

Under Sri Lanka’s monetary law, in addition to intervening in the forex market and engaging in damaging sterilization activities, the central bank is also obliged to settle foreign liabilities of the government as its banker.