Sri Lanka rejects treasuries auction; rupee falls to new low

June 27, 2007 (LBO) – Sri Lanka rejected a weekly treasury bills auction Wednesday as the rupee fell to a new life low against the dollar, dealers said. The local currency traded as low as 111.52 against the dollar before picking up to 111.45, after crossing the psychological 111 rupee barrier just two days earlier.

The monetary authority was also using moral suasion to prop the rupee with at least three banks coming in for censure, dealers said.

Meanwhile in treasury markets the government debt office rejected the mid-week auction, a practice adopted when investors put bids at high prices.

“All bids received at the auction were rejected,” a statement from the public debt department said tersely.

Last week the 3-month Treasury bill rate went up to 17.40 percent.

Analysts say markets are looking for signs of fiscal consolidation to gauge whether interest rates could come down, but a cut in value added tax of some imports announced yesterday has shown that little effort is being made to cut expenditure.

Sri Lanka’s central bank has been pursuing prudent monetary policy since the beginning of the year without printing money to finance the deficit.

Though the rupee has fallen to below 111 rupees, analysts say it would have fallen much further if money had been printed to bridge the deficit.

Last year the central bank printed 38.5 billion rupees putting severe pressure on the currency and driving up inflation to 20.5 percent by January.

Analysts say the rupee may be suffering from a technical overvaluation due to past inflation though severe pressure from money printing is no longer there.

They have also warned earlier that the government’s delay in approving a petroleum price hike would put also pressure on the rupee.