Central Bank lowers outlook for ailing rupee

Sri Lanka central bank expects the rupee to stabilize at current levels of around 132 to the dollar without intervention, a senior official said on Wednesday, abandoning its earlier stance where it had expected the currency to settle at a higher level.

The rupee was trading around 132 per dollar on Wednesday. Both the central bank and the treasury had said only recently that they expected the currency to stabilise below 125 a dollar.

"We think that it will stabilise at these levels unless there is a large oil import bill," Swarna Gunaratna, the central bank's chief economist told Reuters in an interview.

"Even without intervening, the exchange rate has stabilised around 130-131. We don't think that it will go to the 140 or 150 level. It will remain at these levels even without intervening. We want to look what is the trend if we are not intervening," she said.

The bank spent $2.6 billion or a third of its reserves in five months starting in August last year, doggedly defending the currency, attracting the International Monetary Fund's disapproval and delaying one tranche of a $2.6 billion IMF loan. The central bank on February 9 switched to a flexible exchange rate policy, vowing to not intervene except to meet unusually large oil bills. The rupee has plunged some 14 percent since then.

An IMF review mission will visit Sri Lanka next week to asses the $59 billion economy's latest economic performance and, if satisfied, it may release the last tranche of the $2.6 billion loan in July, Gunaratna added.

However, Gunaratna declined to predict the rupee's value as the central bank's new flexible exchange rate policy allows the currency to be determined by market flows.

"It all depends on the inflows and outflows. We expect some inflows in coming weeks and that may help the rupee to appreciate the rupee," she said without elaborating on the volume of inflows.

The central bank would prefer it to be stabilised around 127-128, Gunaratna added.

She reiterated that the central bank will allow the market to determine the rupee level and will only intervene if there is heavy rupee volatility due to large oil bills.

"When there is a heavy pressure to the market due to large oil bill payments, we will support for them, though not for the total bill," Gunaratna said, adding the central bank has already asked the state-run Ceylon Petroleum Corporation to find dollars from the market to finance its import bills.

Sri Lanka's Treasury Secretary on April 30 threatened a return to intervention in the currency market and other measures if the fast falling rupee dropped beyond "tolerable" levels. But the central bank has still refrained from intervention.

© Business Recorder | Reuters


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