Sri Lanka's rupee showings signs of stabilizing: Central Bank

ECONOMYNEXT - Sri Lanka's central bank said the rupee was showing signs of stabilizing, after the rupee came under pressure from money printed from late March to enforce lower interest rates, with the latest data showing that there was a surge in private credit in the month.

"The Central Bank intervened in the domestic foreign exchange market to mitigate excessive volatility in the exchange rate, and the rupee has shown signs of stabilisation" the monetary authority said in its May policy statement.

On Thursday the rupee closed at 157.80/158.10, a new low.

Data showed that private credit in March surged to 122 billion rupees the highest since the 158 billion reached in October 2015 during the height of the last balance of payments crisis.

In March 2017 banks only loaned around 80 billion rupees.

State enterprises and the government had borrowed another 43 billion rupees, data showed.

The central bank terminated repo deals and then tens of billions of rupees through reverse repo auctions to enforce rates as low as 7.6 percent after overnight rates spiked towards its 8.75 percent ceiling rate, which was cut to 8.50 percent.

The central bank then allowed the exchange rate to float, despite having tens of billions of excess liquidity in the system, after a seasonal demand of money for the New Year ended.

Amid interventions, which have so far been unsterilized excess liquidity fell to 0.7 billion rupees on May 10, from 31 billion rupees on April 25.

The central bank has also been mopping up excess liquidity through repo auctions. Amid dollar sales however the volumes mopped up fell to 2.36 billion rupees on May 10 from 10 billion rupees on May 02.

A central bank can successfully defend a currency with unsterilized sales, if it allows liquidity to reduce and rates to move up.

The pressure on a currency peg comes when banks borrow printed money from the central bank to lend.

If more money is injected to keep rates down as dollars are sold (sterilized intervention), more forex reserves could be lost.

The central bank has also been using moral suasion on forex dealers, but analysts say moral suasion must be used on banks borrowing from liquidity windows to lend to customers.

If the March credit spike is temporary, pressure on the rupee may ease, analysts say. Sri Lanka's central bank operates a soft-pegged exchange rate regime. (Colombo/Ma11/2018)