Sri Lanka rupee weakens amid liquidity surge

Jan 23, 2013 (LBO) – Sri Lanka rupee has weakened over the past two days amid a surge of liquidity in interbank markets, with the spot US dollar quoted at around 126.85/95 in morning trade Wednesday, dealers said. On Tuesday the rupee closed at 126.75/85 to the US dollar down from Monday’s 126.62.66 levels.

Excess liquidity in Sri Lanka’s interbank markets has surged over the past two weeks partly due to dollar inflows bought by the Central Bank.

But in January the Central Bank also gives a so-called ‘provisional advance’ of printed money to the Treasury under what analysts have called Sri Lanka’s flawed monetary law.

As the cash is translated into credit or spending which triggers imports, the Central Bank has to either sell down its foreign reserves or sell down its Treasury bill stocks to kill liquidity and prevent the rupee peg from weakening.

In the first week of February term injection of money, which analysts say partly contributed to halting the appreciation of the rupee in the second half of 2012 is due to mature, which will mop up some liquidity.