Sri Lanka rupee weaker after traditional festival

April 19, 2013 (LBO) – Sri Lanka’s rupee weakened to 125.90/126.00 levels Friday from Thursday’s close of 125.72/78, in a steadily weakening trend, dealers said. Market participants say in recent weeks the authorities have tended to defend the currency only around 127 levels to the US dollars in the spot market.

Sri Lanka’s rupee usually gains before a traditional New Year holiday as exporters convert dollars and demand for rupees go up due to cash draw downs from the system, despite a degree of money printing by the state to meet festival advances of state workers.

In late April the cash floods the banking system again.

This year there had been excess liquidity in the banking system due to dollars purchased from capital inflows by the Central Bank, which could generate additional import demand.

Unless the liquidity is sterilized by selling down Treasuries held by the Central bank cash that is loaned out of banks would generate import demand over and above the current dollar inflows weakening the rupee.