CB warns commercial banks to maintain USD rate at ’recommended’ levels

By Duruthu Edirimuni Chandrasekera

The Central Bank on Tuesday requested cooperation from all commercial banks to maintain the exchange rate  - which has shot up in recent weeks in the US dollar vs rupee parity rate - at the formally agreed rate range of Rs. 200 - Rs. 203 per US dollar and, to ensure that it doesn't deteriorate beyond this warning the regulator is ‘ready’ to use whatever instruments and tools available to maintain the exchange rate at the agreed range.

The move caused distortions in the market and confused trading in the inter-bank market on Tuesday.

Addressing a letter to all CEOs of Licensed Commercial Banks and the National Savings Bank, Prof. W.D. Lakshman, Governor of Central Bank (CB) has said that the regulator has noticed the excessive speculative behaviour amongst certain market participants bringing in more pressure on the value of the currency saying that it is seriously inimical to the interests of the people of this country and its long-term sustainable development.

"I wish to draw your urgent attention to the fact that the prevailing conditions in the country, troubled as it is by health concerns associated with the spread of COVID-19 pandemic, do not at all warrant excessive foreign exchange volatility and any further depreciation of the exchange rate. Within this year, the currency value has adjusted from Rs. 185 to Rs. 203 per US dollar. It is, therefore, vitally necessary that all of us work in collaboration in the greater national interest, thus continuing our recent efforts to maintain the rupee exchange rate within the already agreed range," the letter said.’’

The move led banking counters on Tuesdsy to peg the dollar at the CB requested rate compared to earlier where the dollar was being traded at Rs. 210 to Rs.230. Exporters, who were holding onto their dollars hoping to unload it at Rs.230 were left guessing as to what to do, sensing a missed opportunity (in not selling the dollars earlier at a lower rate). The bank-to-bank market has been dealing at a much higher rate that the CB’s daily suggested exchange rate while the informal, money exchange has been much higher. Exporters have been holding onto their dollars, offloading it at Rs. 220-Rs.230 levels.

The CB Governor said the CB has sent the necessary tools and intervention instruments, to be used to ensure that financial institutions, duly comply with the greater national interest that is overwhelmingly paramount.

The excessive volatility in the exchange rate results in adverse adjustments in domestic prices of essential goods, leading to extremely negative and undesirable effects on the living conditions of the public, Prof. Lakshman has said.

The CB and the Government, whose independent views have coincided in respect of maintaining the exchange rate within the agreed range, are acting in concert with each other, to urgently address this matter in the national interest, the letter said.

"As such, we are collectively determined to work towards a resolution of this issue aggressively and pro-actively. Hence, I most unambiguously require the continuous co-operation of all bank CEOs to support these endeavours."

This critical period is certainly not one in which the banks should work in silos to safeguard their private interests, instead, the banks must, as integral components of the financial system and as vital stakeholders, view the economy and the foreign exchange market, from a macro perspective, the letter advised.

"Banks and other stakeholders will also do well when the macro-economy is stable. By allowing the stability of the macro-economy to deteriorate, you will be contributing to difficulties also for yourselves," Prof. Lakshman has pointed out.

"In addition, I observe that there was an increase in the momentum of the country’s export growth in the recent past. As economic growth accelerates with such export growth, there will be some expansion in imports as well. The export growth that is taking place must help to finance this required import expansion. Hence the need for repatriation of export proceeds, which the banks must facilitate."

The international value of the currency will be further strengthened due to the recent receipts of SDR allocation from the IMF and through SWAP arrangements, he has said noting several other inflows of notable size are expected during the remainder of the year, gradually easing out the pressure in the domestic foreign exchange rate. "The CB has been making some interventions as well, in the form of foreign exchange sales and affording access to foreign currency at the agreed rate range,” the letter said.