Thursday, 27 June 2013 02:12
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REUTERS: The Central Bank will maintain flexibility in the rupee exchange rate despite the currency’s weakening trend this month that was mainly due to dollar demand by importers, Central Bank Deputy Governor Nandalal Weerasinghe said on Wednesday.
The rupee fell 0.6% on Wednesday to hit a near seven-month low, extending its losses to 2.5% this month alone. Dealers have said that foreign investors have been selling treasury bonds, adding to the pressure on the currency.
“We are allowing it,” Weerasinghe said, referring to the falling rupee. “We will maintain the flexibility. When we allow the flexibility, the market will take care of demand and supply,” Weerasinghe said in an interview.
Weerasinghe said the net outflow from foreign bond sales totalled only $ 12.5 million over the past two weeks, whereas dollar demand from importers has been much more than that on a daily basis. “So it is wrong to say the depreciation is due to foreigners selling bonds,” he said.
The Central Bank usually intervenes in the market through two state-run banks when the rupee is volatile.
In late 2008, the $ 59 billion Sri Lankan economy faced a balance-of-payments crisis after the Central Bank defended the rupee strongly as foreign investors pulled out of the country’s treasury bonds during the global economic crisis.
The Central Bank on Wednesday cut the statutory reserve ratio (SRR) for commercial banks by 2 percentage points in a bid to boost economic growth after recent monetary easing steps failed to reduce borrowing costs.
Weerasinghe said the Central Bank would make sure the monetary easing would mainly reduce lending rates and not result in a drop in the yield on government securities, which could prompt foreign bond holders to exit.
“We will maintain stable rates in T-bills and T-bonds in the short term by absorbing more than what we want. That is the strategy,” he said. “Only thing we want to see is commercial banks’ lending rates on domestic loans coming down.”
