Sri Lanka rupee strengthens above 126 to the US dollar

Mar 12, 2013 (LBO) – Sri Lanka rupee was quoted stronger at 125.95/126.00 to the US dollar in late afternoon trade Tuesday in the spot market, up from a closing price of 126.45/55 a day earlier, dealers said. Dealers say some banks were looking to sell dollars in the spot market. Market sources say unwinding of some dollar/rupee swaps made last year had increased dollar liquidity.

Swap market rates had also been volatile in recent days, dealers say. The market is illiquid except in the very short term and it is not possible to conduct significant volumes of swaps in the market, dealers say.

Rupee liquidity had also dropped somewhat over the past two days.

The Central Bank said it bought 486 million US dollars from the market so far this year.

With money markets being liquid due to Central Bank dollar swaps, analysts say any swaps market participants had done with the monetary authority could be unwound by reducing excess liquidity.

There had earlier been fears that unwinding swaps may require liquidity to be injected to sterilize its effects on money markets, which could potentially weaken the exchange rate.

Sri Lanka’s rupee had strengthened over the past six months with credit growth slowing.

The monetary authority had also sold down its Treasury bill stake, from around 156 billion rupees on January 01 to around 122 billion rupees last week, indicating that amount of dollar may be retained in its reserves.

Sri Lanka is also started the process of adjusting power tariffs. Higher tariffs will further reduce credit demand from state energy utilities, helping strengthen the exchange rate, and lower inflation and interest rates, analysts say.