Sri Lanka central bank sells dollars to stabilize currency

COLOMBO: Sri Lanka’s central bank sold dollars in the foreign exchange market to stabilize a sliding rupee as foreign investors continued to pull out of treasury bonds after the US Federal Reserve last week confirmed plans to trim its stimulus.
The rupee fell 1.05 percent to hit 130.90, its lowest since Nov. 8, from Wednesday’s close of 129.50/55, weighed down by dollar demand from foreign investors who have been selling T-bonds in the secondary market, currency dealers said.
It closed at 130.70/80, falling 0.94 percent on the day.
Dollar assets have become a big lure for investors as the Fed prepares to dial down its massive bond-buying program, which has triggered a huge selloff in emerging market bonds and currencies in the past week.
However, the rupee recovered to 130.40 as one of the two state-run banks, through which the central bank usually directs the market, sold dollars at 130.40, three currency dealers said. “We intervened in the market to a certain extent,” Nandalal Weerasinghe, the central bank’s deputy governor, told Reuters.
“Apparently, we see demand coming from small bond and equity-related selling. We absorbed 100 percent of the bond inflows. So we have some responsibility to smoothen the market when they are selling, in a way to stabilize the market. We have the space to supply dollars. The bond sales were around $2-$3 million.”
Currency dealers said the absence of exporter selling aggravated the shortage of dollars amid importer panic buying seen on forward.
“Until emerging markets stabilize, the depreciation pressure on the rupee will remain. It can be 2-3 rupees per dollar even with central bank intervention,” said one dealer.
Foreign investors hold over $ 3.6 billion in treasury bills and bonds, central bank data showed.
The central bank, which has repeatedly said it would intervene in periods of excessive volatility, on Wednesday said it will maintain flexibility in the rupee exchange rate despite the currency’s weakening trend.
Dealers said a 2 percentage-point cut in commercial banks’ statutory reserve ratio (SRR) by the central bank earlier would have also prompted foreigners to either take profits or change positions to go for short-tenure securities.
The rupee hit a record low of 134.30 on June 28, 2012, after the central bank moved to a flexible rupee exchange rate regime in February last year. It has fallen 1.4 percent so far this week and 3.3 percent through this month.
The currency depreciated 10.7 percent in 2012.
Sri Lanka’s main stock index edged up 0.64 percent, or 38.68 points, to 6,111.36, ending a four straight session falling streak and recovering from its lowest close since May 3 hit in the previous session.
Investors picked up banking shares, but stockbrokers said concerns over a possible pullout by more foreign funds dented sentiment.
Foreign selling accounted for 72.3 percent of the day’s turnover of 1.31 billion rupees ($ 10.11 million), more than this year’s daily average of around 1 billion rupees.
Foreigners bought stocks worth 451 million rupees on Thursday, while net foreign outflows were 496.6 million rupees, extending the total outflows to 1.17 billion rupees in the last three sessions.