Rupee hits new low, but State intervenes

Wednesday, 29 February 2012 00:04 - - {{hitsCtrl.values.hits}}

CB says will intervene in high volatility
Dealers say CB employing moral suasion

By Shihar Aneez and

Ranga Sirilal

COLOMBO (Reuters): Sri Lanka’s rupee hit a new record low on Tuesday on importer dollar demand, but a State bank sold greenbacks to reverse the drop in an apparent break with the Central Bank’s new policy not to intervene at a specific price, dealers said.

The rupee fell 1.6 percent to hit a record low of 123.40 in early trading, but the Central Bank’s intervention with a $40 million sale through a state bank helped the currency recover to close at 121.40/60, down from Monday’s 121.30/121.50.

It is the first time the Central Bank has sold dollars into the market since announcing on Feb. 9 it was dropping price-specific intervention.

The Central Bank after the market closed said it will intervene in periods of high volatility through dollar sales or moral suasion.

Currency dealers said sustaining such intervention would be difficult as the Central Bank’s heavy rupee defence in the past had depleted the country’s foreign exchange reserves by a third amid a balance-of-payments crisis.

“What the Central Bank may do is they will hold the rupee at a maximum of 123 level until they get some inflows,” a currency dealer said on condition of anonymity.

Some dealers said the Central Bank has asked currency dealers to bring the rupee to 121.00 via moral suasion, a method of coercing the market to move in line with the monetary authority’s desires without direct force.

“This is an overreaction, but it will stabilise soon and we may do something on that,” Central Bank Governor Ajith Nivard Cabraal told Reuters.

Most dealers expect the currency to slide to around 125-130 a dollar by end of this year.