Apr 10, 2014 (LBO) – Sri Lanka’s 500 million US dollar sovereign bond sale this week will not impact the exchange rate as the Central Bank is expected to buy the proceeds, though foreign reserves will go up, Governor Nivard Cabraal said. In order to retain the dollars permanently in the foreign reserves and not cause pressure on the exchange rate, the rupees in the banking system must be ‘mopped up’ or withdrawn through outright sales of securities held by the Central Bank.
According to Central Bank data about 154 billion rupees have been mopped up through term repurchase and short term repurchase deals of securities, amid low credit growth.
“We would probably take the entirety of the proceeds to the central bank,” Cabraal said.
“So it is unlikely that it will have an impact on the overall exchange rate.”
However there was as long term “positive outlook” with foreign reserves expected to reach 8.0 billion US dollars, he said.
The 5-year 500 million US dollar bond sold Monday has a settlement date of April 11.
A central bank that buys dollars prevents the exchange rate from going up and adds rupees in to the banking system.
When the rupees are spent directly or loaned and imports are generated the doll