Can and will sustain rupee defence: CB Chief

Reuters: Sri Lanka’s Central Bank can continue to maintain the rupee exchange by selling dollars from the foreign reserves as it expects large dollar inflows in the coming months, the Central Bank Governor said on Tuesday.

The rupee was devalued three per cent on 22 November, a day after President Mahinda Rajapaksa in his capacity as Finance Minister shocked markets and his own Central Bank by ordering the rupee devalued in his 2012 Budget speech.

Since then, the Central Bank has sold around $ 490 million to defend the currency at 113.90 a dollar after selling over $ 2 billion for the same purpose through the end of September as it maintained a no-depreciation policy. “We can sustain it for any length, because we know that inflows are coming in and we don’t see a reason to stop the intervention,” Governor Ajith Nivard Cabraal told Reuters.

The International Monetary Fund (IMF) has withheld the eighth tranche of a $2.6 billion loan after the Central Bank disregarded its longstanding call to allow exchange rate flexibility, but welcomed the devaluation as “a step in the right direction”.

The global lender has warned the currency defence, which stands in contrast to larger Asian nations that are allowing depreciation, was eroding non-borrowed reserves.

Cabraal firmly believes a $ 1 billion coming in from commercial banks’ short-term overseas borrowings, expatriate worker remittances, tourism revenue and the Government’s long-term foreign debts will keep the reserves healthy.

“Those inflows are enough for intervention. We don’t want the rupee to be fluctuating all the time. We are not allowing volatility or panic,” Cabraal said.

“The Central Bank’s job is to maintain stability and not to maintain the foreign exchange rate at market price. We are doing that. I don’t know why people have to question that.”

Cabraal’s view is in contrast to that of Treasury Secretary P.B. Jayasundera, the other most influential official in matters of Sri Lankan economic policy. He has said the rupee should be market-driven and that reserves are at risk from intervention.

“These are the reserves we built up deliberately to use on an occasion like this,” Cabraal said.

The bank has increased the limit on foreign holdings in Government securities to 12.5 per cent from 10 per cent, while it has relaxed strict regulations on corporate borrowing and debentures to increase inflows.

In 2008, the Central Bank defended the rupee as foreigners cashed in Treasury securities in the face of the global economic crisis, but eventually had to allow depreciation.

Cabraal said the preliminary data had showed Sri Lanka’s economy had expanded more than eight per cent in the third quarter, while recent interest rate spikes of 92-147 basis points on T-bills were a market-driven correction.

“At the moment we think there is no necessity to intervene in the interest rate and the increase is, we think, a right correction,” Cabraal said.