Nivard sees weak rupee recovering to 125

Reuters: Sri Lanka’s central bank expects the steps it has taken to reverse a currency decline to drive the rupee past 125 to the US dollar, but it is not targeting a particular level, Central Bank Governor Ajith Nivard Cabraal said on Tuesday.

The rupee is hovering around 129-130 despite a warning from the authorities last month that they would intervene in the market if it did not appreciate to 125.

“We don’t have a target as such,” Cabraal told Reuters in an interview at his office in Colombo. “We don’t necessarily have a number in mind, but our own assessment is that it should settle below the 125 rupee mark.”

However, he said further steps to curb market speculation, which the authorities say has caused an unwarranted depreciation, could not be ruled out.

“We would probably be watching the situation carefully to see whether it needs any further adjustment, but our assessment right now is that we won’t need to,” he said, when asked if fresh measures to counter speculative trading were needed.

The central bank propped up the rupee with more than $2.6 billion in the second half of last year, but it has fallen 11.9 per cent since the bank halted open market operations on9 February. An over-valued rupee and low interest rates caused the country’s trade deficit to more than double to $9.7 billion in 2011 and turned the balance of payments from a surplus to a $1 billion deficit, prompting the International Monetary Fund (IMF) to withhold a loan payment last August. The IMF approved the delayed tranche of a $2.6 billion loan to Colombo in April with waivers after the country adopted a more flexible exchange rate policy and took measures to avert a balance-of-payments crisis. To deal with the twin deficits, the central bank has taken several steps since February. It has raised its key policy rates twice to two-year highs, allowed flexibility in the exchange rate, restricted credit growth and taken stringent measures to curb speculative trading in the rupee.

“It is really not a fixed exchange rate that we will be seeing in the future,” Cabraal said.

“We would see some fluctuation depending on the timing, depending on the flows at different times, depending on our own appetite to absorb and supply.”

He said an increase in interest rates was not necessary now as the steps taken by the bank have already yielded encouraging signs of an “appreciable cut-back on imports”.

The IMF has hailed Sri Lanka’s efforts to avert a balance of payments crisis in its $59 billion economy, saying they would pave the way for sustainable economic growth even if they bring a short-term slowdown.

The IMF will disburse the last tranche of a $2.6 billion loan to Sri Lanka next month, after which it is unlikely that Colombo will seek further funding from the global lender, Cabraal said. He said the central bank will build its foreign reserves - currently sufficient to finance 3-1/2 months of imports - as an insurance against global economic uncertainties without “removing too much liquidity from the market”.

Cabraal also said that Sri Lanka was planning to issue a fifth sovereign bond, probably before October, but the size and tenure are yet to be decided.