ECONOMYNEXT – Sri Lanka rupee closed at 336/341 to the US to the US dollar Tuesday in the spot market, down from 320/328 to the US dollar, dealers said.
The rupee appreciated steeply after the central bank lifted a surrender rule ending a guided peg, leading to heavy selling by dollar holders and banks.
Banks that oversold dollars can now make profits, buy covering their position, market analysts said.
Related Sri Lanka to operate ad hoc exchange rate peg from March 07
The central bank is now operating an ad hoc peg without a transparent pre-determined path, without any any assurance that dollars it buys from the market is sold back to maintain exchange rate stability.
Under the earlier guided peg, the central bank sold back dollars back, and due to a private credit contraction it started to sell lower levels of dollars than it bought in the last quarter.
When a central bank buys dollars it creates new rupees. If the holders of the new rupees spends the money especially on imports, and it is not sterilized, the agency has to sell back the dollars and take back the liquidity to keep the exchange rate stable.
However under an ad hoc peg or intermediate regime there is no obligation for the central bank do so. Intermediate regimes are found in all countries that suffer monetary instability and go the IMF. Many of them, which got market access in recent years, have now defaulted. (Colombo/Feb15/2023)
