Sri Lanka’s central bank governor Indrajith Coomaraswamy on Tuesday said defending the rupee with foreign exchange reserves ‘doesn’t seem sensible’ as it has always been followed by a sharp depreciation in the currency.
Coomaraswamy’s comments come days after the central bank, which earlier had defended the currency, said that “depreciation of the rupee has not only negative implications, but also positive implications on the Sri Lankan economy”.
The island nation’s monetary authority has defended the currency from time to time without much success.
However, President Maithripala Sirisena government had given some flexibility to the market, though dealers said the central bank had controlled the currency through moral suasion.
Coomaraswamy said it has been very difficult to defend the exchange rate by spending the country’s reserves.
The central bank spent $4.2 billion in 2011-2012 before a 14 percent depreciation and 2.1 billion in 2015 before a 9 percent fall in the rupee, he said.
“It doesn’t seem sensible to spend large amounts of reserves defending the currency if you are going to depreciate end of the day. It doesn’t really make sense,” Coomaraswamy told reporters in Colombo.
“There is an underlying pressure on the rupee all the time. The way to get over that is to either increase our exports of goods and services, and get more remittances, more non-debt creating foreign direct investment and institutional inflows.”
The rupee has been under pressure last year due to higher imports and foreign investors exiting government securities.
Foreign investors net sold 43.64 billion rupees worth of government securities in calendar 2016.
The central bank had raised the spot currency reference rate to 150.00, a record low against the U.S. dollar.
Since the central bank’s statement on depreciation last month the market has been bracing for some depreciation in the rupee in January. (Reuters)