CB says rupee outlook unchanged from 125

Reuters: The Central Bank said on Thursday it still believed the battered rupee would stabilise at levels stronger than 125 to the dollar, despite comments from a senior bank official.

Chief Economist Swarna Gunaratna told Reuters on Wednesday that the Central Bank expected the currency to stabilise at current levels, which are now around 132.

The comments spurred speculation that the Central Bank was lowering its outlook for the rupee, which has plunged some 14 per cent since early February when authorities moved to a more flexible currency regime.

“We think that it will stabilise at these levels unless there is a large oil import bill,” Swarna Gunaratna said.

“Even without intervening, the exchange rate has stabilised around 130-131. We don’t think that it will go to the 140 or 150 level. It will remain at these levels even without intervening. We want to look what is the trend if we are not intervening.”  

The Central Bank issued a statement on Thursday.

“As the Central Bank has repeatedly stated, the exchange rate is expected to stabilise below 125 per US Dollar.”

Two currency traders said the market was expecting the rupee to trade between 130-135, given limitations in getting more foreign inflows in highly volatile global markets.

“A level near 132 is realistic. But the 125 level is possible when we get around $ 3 billion inflows through foreign investments,” a dealer said on condition of anonymity.

The Central Bank said on 8 May it could accommodate a further $ 400 million of foreign investment in Government securities this year and intended to issue a sovereign bond between $ 500 million to $ 1 billion in 2012.

However, weak global market sentiment remains a concern.

The Central Bank spent $ 2.6 billion or a third of its reserves in five months starting in August last year, doggedly defending the currency.

The repeated interventions dismayed the International Monetary Fund, which delayed the release of one tranche of a $ 2.6 billion loan to Colombo. After the Central Bank changed to a more flexible policy, the IMF approved the payment.

An IMF review mission will visit Sri Lanka next week to assess the $ 59 billion economy’s latest economic performance and, if satisfied, it may release the last tranche of the loan in July, Gunaratna added.

“It (the rupee level) all depends on the inflows and outflows,” Gunaratna said.

“We expect some inflows in coming weeks and that may help the rupee to appreciate the rupee,” she said without elaborating on the volume of inflows.

The Central Bank would prefer it to stabilise at around 127-128, Gunaratna added.

She reiterated that the Central Bank would allow the market to determine the rupee level and will only intervene if there is heavy rupee volatility due to large oil bills.