Flexible exchange rate policy from next week

• CBSL mops up a recent record of $ 308 m from market this week
• Trading band and variation margin will be done away with next week along with mandatory forex sales by banks
• Requirement of timely repatriation and conversion of foreign earnings and inflows will continue to remain

The Central Bank yesterday declared that the country would pursue a flexible exchange rate policy from next week in line with recommendation of the International Monetary Fund (IMF).

The move entails the removal of the trading band and variation margin and letting the market (demand and supply) determine the rate. The CBSL will also suspend the mandatory forex sales requirement of banks. The latter was reduced to 15% from 25% earlier this week.

However other requirements such as 100% repatriation of export proceeds and conversion will continue.

The CBSL has been widening the trading band of dollar this week to give more leeway for the forex market.

CBSL expanded the daily trading band to +/- of Rs. 5 from Rs. 2.60 previously. Thereafter it was increased to Rs. 7.50 on Thursday and to Rs. 10 yesterday. This will be done away with from next week.

Governor Dr. Nandalal Weerasinghe revealed that this week the CBSL absorbed a recent time record $ 308 million from the market thereby checking a sharper appreciation of the Rupee. This week the Rupee had appreciated by nearly 5%. He said that CBSL will accept the 15% mandatory forex sales by banks on Tuesday and desist from such a move thereafter. However, Dr. Weerasinghe said that CBSL will remain in the market to buy or sell Dollars if and when needed to bring stability in the event of extreme volatility.

He said by absorbing $ 308 million, the money market has benefitted from an additional liquidity of Rs. 108 billion.  “This week the forex market began to be active as before with participants having extra options of spot and forward contracts as opposed to swaps only,” CBSL Chief said.

“Going forward we expect both forex and money markets to be active as before. We are happy to see this development especially the former following stabilisation measures earlier on and a pick-up in forex inflows and availability,” Dr. Weerasinghe added.