Sri Lanka rupee fell from late 2011, with the sharpest drop in March from 110 to 130 rupees, after the Central Bank started to sterilise foreign exchange sales to prevent interest rates going up.
Policy Contradiction
To keep an exchange rate fixed, interest rates have to be allowed to float. Such a monetary arrangement, where monetary and exchange rate policy is complementary, is known as a hard peg or currency board.
Sterilising foreign exchange sales with freshly printed money is also a 'stimulus', boosting domestic demand and bank credit to an unsustainable level which then spills over to the balance of payments via imports.
To correct the problem coming from contradictory monetary and exchange rate policies, high interest rates or a st