Sri Lanka’s rupee closed firmer at 324.00/325.50 against the US dollar in the spot market on Tuesday, appreciating from 325.50/327.00 the previous day, dealers said, while Treasury bond yields rose sharply across the curve.
The telegraphic transfer rate was quoted at 316.50 buying and 325.50 selling. Bond yields climbed at every maturity: a bond maturing in September 2027 closed at 9.90/10.40 percent, up from 9.15/9.50, while a June 2034 bond rose to 11.50/12.00 percent from 11.30/11.40.
The moves followed the Central Bank’s surprise 100-basis-point increase in the Overnight Policy Rate to 8.75 percent — its first rate rise in 12 months — aimed at curbing demand-driven inflation. The decision came days after the rupee’s selling rate touched a three-year high of 354 to the dollar on Thursday, amid claims the Bank had failed to mop up excess liquidity.
Central Bank Governor Nandalal Weerasinghe said the monetary authority could deploy more instruments if needed to maintain price stability, but preferred to lead with a “clean instrument” — the interest rate.
“That’s what we have used here. If that is not sufficient, we can use any other instruments. Now it is not necessary for us to use any other instruments because the exchange rate has already stabilised,” he told reporters at the post-policy briefing.
Analysts welcomed the rate hike. The rupee’s recovery contrasts with recent forecasts of a rebound toward Rs.320, while the Colombo Stock Exchange also closed higher on the day.
Source: EconomyNext.
