CB says no need for FX intervention

Saturday, 21 April 2012 02:08 - - {{hitsCtrl.values.hits}}

Reuters: The Central Bank said on Friday that despite heavy depreciation pressure on the rupee, there was no need to intervene in the market as the country would see $ 574 million of inflows within a month.

On Friday, the currency was trading near its record low of 131.60 per dollar, hit on 19 March due to importer demand and the market has been expecting further depreciation when the Central Bank stops its dollar supply to meet oil bills from the next month.

“We don’t need to intervene as there will be enough inflows. The country will see $ 574 million inflow within a month,” Central Bank Governor Ajith Nivard Cabraal told Reuters from Washington, where he is attending IMF/World Bank Spring Meetings.

The Central Bank was compelled to allow flexibility in the rupee exchange rate after blowing more than $ 2.6 billion of its reserves to stave off depreciation, resulting in a $ 1 billion deficit it Sri Lanka’s balance-of-payments last year.

The International Monetary Fund withheld a loan tranche of a $ 2.6 billion loan since September after the central bank failed to allow flexibility despite repeated requests from the global lender. It disbursed the tranche after the Central Bank’s policy change in the exchange rate.

“We have stopped intervening and we have said we will stop intervening in the oil (import) bills as well from the next month. It does not necessarily mean that we won’t intervene (ever again). But since there are inflows, I don’t think we need to intervene,” Cabraal said.

He said a $ 74 million inflow will be realised for a tourism investment project from India’s ITC Ltd. conglomerate.

Sri Lanka’s State-owned Bank of Ceylon plans to sell a $ 500 million bond and the tenure is likely to be five years with the inflows from the proceeds expected in May, a source close to the deal told Reuters on Friday.

Three currency dealers on Friday said a state bank intervened to prevent the rupee from falling beyond 130.60, though trade was thin.

The rupee hardly moved despite Cabraal’s comments.

“The market does not believe stories now and we need to see real inflows,” said a currency dealer on condition of anonymity. “If the inflows come, then of course, the rupee will turn around.”

The currency has depreciated 12.2 per cent since the Central Bank stopped defending it on 9 February after repeatedly saying there will not be any depreciation in 2012 after a three per cent devaluation on 21 November.