CB to keep rupee steady with little volatility

Saturday, 18 June 2011 01:22 - - {{hitsCtrl.values.hits}}

By Shihar Aneez

Reuters: Sri Lanka will keep the rupee stable within a narrow trading band and the Central Bank will continue to intervene in the foreign exchange market during periods of high volatility, a top Central Bank official said on Friday.

The Central Bank’s comments comes as the International Monetary Fund (IMF) last week urged it to avoid continuous sales of foreign exchange to support the rupee and to be more flexible to ease balance of payment pressures.

“We can’t induce flexibility purposefully. If you look at the exchange rate, there is flexibility within a narrow range,” K.D. Ranasinghe, the Central Bank’s Chief Economist, told Reuters in an interview.

“Our policy is to maintain a stable exchange rate and not a volatile exchange rate. Stability is the main focus and that is there in the market. So we can’t purposefully fluctuate the exchange rate. That is not the purpose,” he said.

The rupee has risen 1.3 per cent against the US dollar so far this year and more than 12 per cent from the record low it hit on 23 April 2009, before the IMF approved a $2.6 billion loan to boost the island-nation’s foreign exchange reserves and help to ease pressure on balance of payments.

The IMF has advised policymakers to follow a ‘free float in a non-destructive way for the longer term’.

Sri Lanka’s Central Bank uses a managed exchange rate with adjustments in a narrow dollar trading band, which was at 109.10/60 on Friday, but had allowed gradual appreciation in the currency, citing inflows from exports and worker remittances.

“There is volatility and fluctuation within that range. The Central Bank will intervene on both sides depending on significant changes in the exchange rate,’ Ranasinghe said.

“If there is big oil bills to be settled, our market is not that big to absorb this. So in such times, some support is needed. Otherwise there will be huge volatility, which is not a good thing for the market.”

Analysts and economists have said the Central Bank’s ‘gradual appreciation’ strategy is to curb imported inflation due to increasing high global commodity prices, particularly oil.

Ranasinghe said inflation is easing due to increased local supplies after two rounds of floods early this year. He said annual inflation would continue to ease in June compared with 8.8 per cent in May and a 27-month high of 9.8 per cent in April.

“The supply side has improved and there will be a significant moderation in the inflation this month from 8.8 per cent,” he said, adding that the decline would not be due to the change to a new inflation index.

With inflation easing, Ranasinghe said the current monetary policy rates are appropriate to achieve a 2011 economic growth target of a record 8.5 per cent, from a 32-year high expansion of eight per cent last year.