FINANCIAL CHRONICLE – Central Bank Governor Nandalal Weerasinghe has reported that anxious importers have recently acquired US dollars at rates ranging from 380 to 400 rupees, particularly within the forward market, amid ongoing volatility in the foreign exchange markets.
With the interbank market either stalled or inactive, a parallel exchange rate has surfaced in Sri Lanka, where banks are offering dollars to customers at rates disconnected from those in the interbank market through internal matching processes. “When the interbank market was hovering around 330 rupees, importers were purchasing dollars at rates of 345 to 354 rupees at times,” Governor Weerasinghe stated during a press briefing following a 100 basis point interest rate increase aimed at curbing credit expansion.
He noted, “There was no correlation; interbank trading was minimal at around 330 rupees, while importers faced rates close to 350 rupees. Additionally, in a state of panic, some importers opted to purchase dollars at rates between 380 and 400 rupees.”
On Thursday, foreign exchange dealers convened with the central bank, leading to actions that would enable the interbank rate to align more closely with the rates offered by banks to their customers. Historically, there has always been a difference between the interbank rate and the customer bank rate. “What we identified was a distortion,” Governor Weerasinghe explained. “In the interbank market, the commercial bank rates should typically fluctuate within a narrow margin, but they diverged significantly.”
Measures have been introduced to stabilize the interbank rate in relation to commercial bank rates, fostering an environment where a fully operational interbank market aligns with other market activities.
Concerns have been mounting over the past few weeks, as the interbank market has been increasingly constrained by strong moral persuasion from authorities. Following the allowance for dealers to quote rates freely, the interbank spot market surged, prompting exporters to sell their holdings. Market analysts have indicated that exporters are also apprehensive about a potential reduction in the foreign exchange conversion period from 90 days to 30 days.
Additionally, the activity in both the spot and forward markets has led to an increase in the net open positions of banks, which have also been compelled to sell in the spot market, thereby exerting downward pressure on interbank rates.
There have been numerous warnings regarding the inherent flaws of the so-called ‘flexible’ exchange rate system, suggesting it is ill-equipped to handle shocks, which can trigger panic in the market and compromise governance, leading to arbitrary actions by the state.
In response to these challenges, the central bank has raised interest rates to control credit flow and initiated term repo transactions to absorb excess liquidity, although no participation has been observed thus far.
