COLOMBO, Jan 4 (Reuters) - The Sri Lankan rupee ended steady in thin trade on Wednesday amid worries over slowing foreign fund inflows and after the central bank chief signalled a change in the monetary authority’s intervention policy to defend the currency.
Central Bank Governor Indrajith Coomaraswamy said after the markets closed 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 ending at 150.90/10 per dollar, compared with Tuesday’s close of 151.00/20.
One-week forwards were quoted around 150.20/30 compared with Tuesday’s close of 150.25/35, while spot-next forwards and the spot rupee were hardly traded, dealers said.
“We saw some demand in the morning but it has eased. There were some state bank dollar sales too,” said a currency dealer who declined to be named.
“The central bank governor’s statement makes sense. It is more sensible to allow market players to determine it.”
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” is unsustainable.
A smooth market-based exchange rate would prevent highly disruptive adjustments after periods of stable rates artificially maintained by continuous central bank intervention.
“It is time to stop this pattern and commence building up of external reserves through sustainable foreign exchange inflows,” the governor said, quoting from the document.
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.
The banking regulator raised the spot reference rate by 50 cents last week, after a 40-cent increase in each of the previous two weeks amid sustained pressure on the currency. (Reporting by Ranga Sirilal and Shihar Aneez; Editing by Amrutha Gayathri)