Sri Lanka rupee gains after opening, overnight rates tighter

Mar 06, 2012 (LBO) – Sri Lanka’s rupee was quoted wide on opening at 121.70/122.10 against the greenback and gained slightly in late morning trade to 121.80/90 amid foreign bank selling while overnight rates were tighter, dealers said. The rupee closed around 121.95/122.05 Monday.

Gilt backed repos were quoted around 8.80/8.90 percent up about 10/20 basis points from a day earlier while call money was quoted around 8.80/90 percent dealers said.

Banks borrowed 3.0 billion rupees from a reverse repo auction Monday at an average yield of 8.77 percent and 7.7 billion rupees from a standing facility at 9.0 percent.

Interbank markets liquidity tightens when the central bank intervenes in forex markets and demand in the economy increases when the shortages are ‘sterilized’ via an expansionary fashion via rupee injections creating fresh pressure on the currency.

While it is possible to maintain a peg with non-sterilized interventions (which automatically tightens monetary policy) if domestic rates are allowed to rise, it is not possible to defend a currency peg with sterilized interventions.(Sterilized Interventions, non-sterilized interventions and monetary policy – Fed Reserve, Cleveland)

In a sterilized intervention a central bank sell dollars in return for rupees and simultaneously sells rupees in return for bonds from banks or other agents, to resist a contraction in the monetary base, adding to domestic demand and imports.

Since sterilized intervention started in September 2012 Sri Lanka has lost more than a quarter of its foreign reserves and the rupee has fallen from 110 to 121 levels.

Sri Lanka has continued to lose reserves since a partial float on February 09.