The Sri Lankan rupee fell 0.9 percent on Monday, December 29, hitting a record low of 113.80/114.00 per dollar, surpassing the previous low of 113.45/113.55 on September 19, 2007.
The rupee has fallen around 3.4 percent since December 8 and 5.2 percent since October 30.
Currency dealers said a state bank, which usually represents the Central Bank, was not seen intervening in the market as it had done in past weeks.
"Later a state bank which usually represents the central bank offered dollars at 113.80 to direct the market and avoid sharp volatility," said a currency dealer.
The state bank’s action allowed the rupee to recover slightly from its all time low.
In recent weeks Sri Lanka has intervened heavily to stabilise the rupee. Whilst the Central Bank says it is in favour of a ‘limited’ depreciation of rupee its actions, however, are having the opposite effect.
According to Central Bank governor Ajith Nivard Cabraal the rupee has been allowed to depreciate ‘a little bit’ to improve export competitiveness, Reuters reported.
Cabraal said exporters had clamoured for a weaker rupee because of "tremendous pressure" on their businesses.
Although the Central Bank says the depreciation is allowed in the hope of a weaker exchange rate boosting exports, and replenish its dwindling foreign reserves, it could be in preparation for a request to the International Monetary Fund for a bail-out, as the latter would demand a weaker currency as a condition of any financial assistance.
Sri Lanka is under pressure to shore up the dwindling foreign reserves that has fallen a third to just $2.37 billion between the end of August and the end of October, equal to about two months of imports.
Foreign exchange reserves have declined as the economy was first hit by the soaring cost of commodity imports and more lately by the global economic downturn. The central bank has said it could have a balance of payments deficit in 2008.
Whilst claiming it favoured a ‘limited’ depreciation of the rupee, on Tuesday December 30, the central bank ordered commercial banks to reduce their net dollar positions prompting the rupee to rise as much as 0.8 percent.
Currency dealers said the central bank's action would force commercial banks to sell dollars in the market.
"The cut depends on individual bank. Some banks face around 50 percent cut in their net long-dollar positions," said a currency dealer.
The central bank, also said the government's exposure to foreign exchange risk has significantly declined, but analysts said the state was desperate for dollars after spending a third of its reserves to protect the rupee.
