Dealers said the rupee to fell to around 117.50 against the greenback during the day, with some trades going at Rs. 118. But the currency gained some ground to close at Rs. 117.20/30.
The rupee has fallen by nearly 3 percent from Rs. 113.90 against the dollar before the Central Bank announced it would no longer intervene in the market to stabilise the exchange rate.
Since July 2011, the Central Bank had sold nearly US$ 2.5 billion from the reserves to maintain a fixed exchange rate with high credit growth fuelling ‘severe’ import demand, dealers said.
Dealers said the rupee could fall to around Rs. 120 against the dollar.
“We do not see the rupee falling beyond this. We see a lot of speculation and panic buying by importers but this is only natural. The market would soon settle somewhere within the Rs. 118 range with occasional volatility,” a dealer said.
Dealers said the Central Bank could still intervene if it wanted to.
“We feel the Central Bank would have a psychological limit and would perhaps intervene to keep the rupee within this limit. What it is we do not know, but we feel the bank may intervene to prevent sharp fluctuations, although it seems to have adopted a stance of distancing itself from the market just to gauge where the exchange rate was heading,” a dealer said.
Dealers said that there was a degree of caution in the foreign exchange market.
“Pressure for the rupee to depreciate was so severe that we find it hard to believe that the exchange rate did not fall as sharply as expected.”
Expected foreign currency inflows and high interest rates are expected to ease the pressure on the rupee going forward.
“The distortions in domestic fuel prices have been corrected, although too late with drastic repercussions fuelling country-wide protests, and this could also ease some pressure on the balance of payments going forward. The recent interest rate hike it is hoped would also dampen import demand further,” a dealer said.
Interbank interest rates have been somewhat muted despite the announced hike to monetary policy rates, this was due to the Central Bank still pumping in rupees to the banking sector as some banks continue to find it difficult to maintain overnight balances.
Call money market rates for interbank borrowings not backed by collateral stayed flat at 9.80 percent yesterday and last Thursday. Easing somewhat from 9.95 percent on February 03, the day the Central Bank announced the interest rate hike.
Market repo rates for interbank borrowings backed by security eased to 8.70 percent from 8.72 percent last Thursday. On February 03, the rate was 8.71 percent.
The Sri Lanka Interbank offered rate was at 9.96 percent, from 9.70 percent last Thursday. On February 03, the rate was 9.56 percent.
Since February 03, the Central Bank has pumped in Rs. 42 billion into the banking system struggling to maintain overnight balances.
Banks had to borrow nearly 4 billion since February 03 from the Central Bank via the reverse repurchase window at 9 percent. This option is used as a last resort for banks facing liquidity constraints.