Sri Lanka Eases Grip on Rupee as Emerging Currencies Show Strain

• Rupee weakens the most since March 2012 to record low
• Move to let market play "greater role" in determining FX rate

 By Anusha Ondaatjie-September 4, 2015

Sri Lanka loosened the grip on its currency, becoming the latest country to signal it was giving way to the stress that’s engulfing developing economies as the U.S. moves closer to raising interest rates.

The Colombo-based central bank will no longer give a daily intervention rate from Friday “to let the market play a greater role in determining the exchange rate,” Deputy Governor Nandalal Weerasinghe said in a telephone interview. The rupee fell the most in more than three years. 

Policy makers from Vietnam to Kazakhstan followed China in devaluing currencies last month in bids to shore up their economies as tumbling commodity prices curb revenue and prospects for higher U.S. rates damp demand for riskier assets. Sri Lanka’s decision to ease controls on the exchange rate follows a fourth straight month of declines in exports.

 

The move showed Sri Lanka “was not blind to outside forces," Finance Minister Ravi Karunanayake said on Friday.

Since China’s surprise devaluation of the yuan on Aug. 11, currencies from South Africa’s rand to Mexico’s peso tumbled to all-time lows and emerging-market stocks slumped into bear markets. The currency of India, Sri Lanka’s biggest trading partner, has lost 3.9 percent in the period.

Still Managed

The island nation’s rupee weakened 2.1 percent at 137.75 against the dollar and is down 2.9 percent in the past month. The monetary authority will still intervene when necessary, Weerasinghe said. The central bank said yesterday it had received funds from a $1.1 billion swap with the Reserve Bank of India that would help bolster reserves.

“This is still a managed float,” said Bimanee Meepagala, Colombo-based fund manager at NDB Wealth Management Ltd. “It could lead to a marginal depreciation in the rupee and a marginal rise in rates.”

 

Central Bank Governor Arjuna Mahendran said Aug. 17 that the country needs to draw a fine line between maintaining competitiveness of the rupee to boost exports while protecting local investments of citizens living abroad.

Exports in June fell 4.2 percent from the previous year, the fourth straight monthly decline. Consumer prices dropped 0.2 percent in August from a year earlier, matching the previous month’s move, which was the steepest in data going back to 1996.

Stocks and currencies from developing countries fell on Friday after U.S. jobs report showed weaker-than-forecast growth in hiring balanced by the lowest unemployment rate since April 2008 and an increase in average hourly earnings. 

Investors raised bets on a September liftoff to 36 percent from 26 percent before the U.S. data, while that’s still less than the 48 percent odds predicted before China devalued the yuan last month.

Sri Lanka Central Bank Governor Arjuna Mahendran said Aug. 17 that the island nation needs to draw a fine line between maintaining competitiveness of the rupee to boost exports while protecting local investments of citizens living abroad.

Exports in June fell 4.2 percent from the previous year, the fourth straight monthly decline. Consumer prices dropped 0.2 percent in August from a year earlier, matching the previous month’s move, which was the steepest in data going back to 1996.

Sri Lanka’s central bank said yesterday it had received funds from a $1.1 billion swap with the Reserve Bank of India that would help bolster reserves.