The Central Bank (CB) has warned commercial banks against speculation and threatened action against some after the rupee hit an all-time high of Rs. 133 per US dollar on Wednesday.
The rate, however, settled down to Rs 130 on Friday, dealers said. There were reports that CB officials had visited at least two banks to check their books and ascertain whether speculative trading had taken place to unrealistically drive up the dollar rate in local foreign exchange markets.
“It’s nothing but speculation that is driving this rate and we have warned banks against this and will take action (if they don’t comply),” Central Bank Governor Ajith Nivard Cabraal told the Sunday Times yesterday.
Bankers, however, said there was little room for speculation due to stringent restriction of foreign exchange positions held by banks. “The rate going up this week was generally because a few banks needed extra dollars,” one bank dealer said.
The gyrations of the rupee, rising from Rs. 110 in November 2011 just before the Budget announced a 3% devaluation to Rs. 130-133 this week, has caused some concern and uncertainty amongst exporters, importers and the public, the latter in particular worried about the impact on imported food (fuel, wheat flour, dhal, etc) prices and reciprocally the cost of living.
Volatility in the market after the Central Bank withdrew in February from intervening in the market, led to a sharp rise in the dollar. Now both the CB and banks are concerned at the current level of the dollar and its volatility which they say is not beneficial for imports or exports.
Pressure is also mounting on the CB to resume intervention and stabilize the market, as expressed at a meeting on Thursday between the Treasury, heads of banks and senior CB officials.
“Some banks urged the CB to intervene in the market and also minimize the restrictions currently in force like reduced foreign exchange positions and shorter forward booking periods,” one dealer, who was present, said. He quoted CB officials as saying their views would be taken into consideration.CB officials have been in regular contact with banks throughout the week to ensure stability in the market.
Mr. Cabraal, who returned to Colombo on Friday after being part of President Mahinda Rajapaksa’s entourage to South Korea, believes his position is somewhat vindicated by the new call for CB intervention.
“When we were intervening in the market last year, everyone complained saying the CB was using its reserves to hold back the rupee to artificially low levels. Now what is happening? We pull out, the rupee goes up and we are being virtually begged to return to the market,” a visibly, annoyed Governor said.
Many in the banking sector whom the Sunday Times spoke to yesterday are in favour of the CB returning to the market and intervening in small quantities to stabilize the rupee because of the mismatch between imports and exports, and also the huge current account deficit.
Mr. Cabraal said the CB’s position, since its withdrawal in February, has always been that it would intervene in the market ‘when the need arises’, a view that has been repeatedly reported in the Sunday Times and the Business Times.
“We have not said we are pulling out completely. No Central Bank in the world does that. We will intervene if the rupee goes to some unrealistically low levels,” he said. Asked at what rate the CB would intervene, the Governor said laughing, “That is a closely guarded secret”.
“But we will intervene, that assurance we have given to the market,” he said.
He said the banks claim the new restrictions did not permit any speculative trading. “However within those limits too speculation is taking place,” he added. |
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