Sri Lanka central bank allows fall in spot rupee after 2 months; forwards steady

Sri Lanka's central bank allowed a fall in the spot rupee on Thursday for the first time in two months, but defended it amid importer dollar demand ahead of a long holiday, while dealers expect the currency to remain under pressure from lower interest rates. The central bank allowed a 10-cent fall in the spot rupee to 133.00 per dollar after holding it at 132.90 since February, when it set a level beyond which it would not allow the currency to fall.
Dealers, however, said the spot rupee did not trade as the central bank did not allow trades below 133.00 through moral suasion. Actively traded two-month forwards ended at 135.36/50 per dollar, while three days above one-month forwards were steady at 134.90/135.00 as the central bank prevented it being traded below 134.90. "There are no inflows as nobody is converting due to the easy access of cheap funds in a low interest rate regime. The depreciation pressure is there, but moral suasion is preventing it," said a currency dealer asking not to be named.
Dealers said the central bank has kept the spot rupee and all forwards up to one month steady through moral suasion. Central bank officials were not available for comment. The exchange rate is under pressure after the central bank slashed its key monetary policy rates on April 15 with market interest rates on a falling trend since then. Yields on treasury bills fell 3 to 11 basis points (bps) on Monday at a weekly auction, extending their decline to 41-51 bps since the rate cut. Two-week and one-week forwards ended steady at 133.90/134.00 and 133.60/70 per dollar, respectively.