COLOMBO, Jan 5 (Reuters) - The Sri Lankan rupee traded weaker on Thursday due to dollar buying by foreign banks, but the central bank’s moral suasion prevented further decline, two days after the monetary authority’s chief signalled a change in its intervention policy to defend the currency.
Central Bank Governor Indrajith Coomaraswamy said on Tuesday that defending the rupee with foreign exchange reserves “doesn’t seem sensible” as it has always been followed by a sharp depreciation in the currency.
Rupee forwards were active, with one-month forwards trading at 151.00/30 per dollar at 0535 GMT, compared with Wednesday’s close of 150.90/10.
“The one week forwards traded at 150.40 and 150.50, but moral suasion forced reversal of deals below 150.40,” said a currency dealer who declined to be named.
“There is (dollar) demand from some foreign banks probably for bond outflows.”
One-week forwards were quoted around 150.35/56 per dollar, compared with Wednesday’s close of 150.20/30, while spot-next forwards and the spot rupee were hardly traded, dealers said.
The central bank said in a policy document on Tuesday that experience had clearly demonstrated that maintaining “an overvalued exchange rate at the expense of external reserves” was unsustainable.
A smooth market-based exchange rate would prevent highly disruptive adjustments after periods of stable rates artificially maintained by continuous central bank intervention.
The central bank said it was time to stop this pattern and commence building up of external reserves through sustainable foreign exchange inflows.
The rupee has been under pressure due to rising imports and net selling of government securities by foreign investors, dealers said.
On Friday, the central bank raised the spot currency reference rate to 150.00, a record low against the dollar.
Sri Lankan shares were steady at 6,153.39 as of 0524 GMT. Turnover stood at 480 million rupees ($3.21 million).
$1 = 149.4000 Sri Lankan rupees Reporting by Ranga Sirilal and Shihar Aneez; Editing by Amrutha Gayathri