The Sri Lankan rupee traded firmer on Wednesday as exporters and banks sold dollars due to tight rupee liquidity in the market, while state banks’ bought the greenback to prevent possible sharp gains in the local currency, dealers said.
Dealers said the two state banks, through which the central bank intervenes to direct the market, bought dollars at 130.30 rupees, five cents below the previous day’s level, to prevent sharp volatility in the currency.
Dealers expect the local currency to face upward pressure until demand for imports and credit picks up.
The rupee was at 130.30/35 per dollar at 0503 GMT firmer from Tuesday’s close of 130.34/38.
“Banks sold dollars due to rupee liquidity shortage, the central bank also lowered the buying range to 130.30 from its yesterday’s level of 130.35,” said a currency dealer asking not to be named.
Two other dealers confirmed the move, while central bank officials were not immediately available for comment.
On Monday the central bank had said the dollar buying by the state banks was for oil imports.
An official at the central bank’s International Operations Department told Reuters on Monday that the bank has been buying only the excess dollars.
Central Bank governor Ajith Nivard Cabraal on Friday told Reuters that the central bank would keep intervening in currency markets to prevent a too-rapid rise in the country’s rupee currency.
He said the country will probably see a tendency for the rupee to appreciate in the next few years, and the central bank is keen that whatever movement takes place happens in a “fairly gradual” manner.
Cabraal also said the central bank does not have “an upper pain threshold” for the rupee, but “more of a volatility tolerance threshold”.
Ananda Silva, one of the two deputy governors at the central bank, told Reuters on Wednesday that the monetary authority has absorbed over $400 million as of May 27 of this year to prevent a sharp appreciation in the rupee.
Dealers say the central bank’s intervention has prevented gains in the currency and expect it to face upward pressure until credit growth and imports pick up.
Despite multi-year low interest rates, data on May 5 showed private sector credit grew at a four-year low of 4.3 percent in March from a year earlier. It hit a record 35.2 percent in March 2012.
Sri Lanka’s main stock index was down 0.04 percent, or 2.50 points, at 6,283.52 at 0515 GMT. Turnover stood at 285.4 million rupees ($2.19 million), with 8.1 million shares changing hands. ($1 = 130.3650 Sri Lankan Rupees) Reuters reports.