MONETABRIEF - The Sri Lanka rupee closed at 329.45/55 to the US dollar in the spot market Friday down from 330.10/20 a day earlier, dealers said as the central bank allowed the currency to appreciate.
The central bank through its reserve building operations (monetizing the balance of payments) can depreciated the rupee at will even when there is some deflationary policy.
However, it can also bust confidence in forex markets at the slightest shock, by denying convertibility to the rupees it had created in the purchase of dollars.
At the moment, confidence in the currency is high with foreigners buying bonds but excess liquidity is climbing. Some of the money is in the SDF window, some are mopped up overnight giving slightly higher rates to banks as they look for borrowers who will take the cash, invest and trigger imports.
The rest of the fund is awaiting customers and imports through term repo deals.
However, if the dollars are sold to the government for cash, there are no imports and the dollars can be kept in fiscal reserves and repay debt, reducing the current account deficit or making it into a surplus.
If the Treasury demands the dollar for cash, and excess liquidity falls, it will be less easy to depreciate the currency and undermine the credibility of a democratically elected government as has been done in the past, especially after the end of a civil war.
There are increasing calls for the Treasury to buy dollars, so that macro-economists will be deprived of another tool to trigger monetary instability and undermine democracy.
In capital markets, some bond yield fell.
A bond maturing on 01 Jul 28 closed at 10.00/10 percent from 10.05/10 percent
A bond maturing on 15 Sep 29 closed at 10.45/55 percent up from 10.40/50 percent
A bond maturing on 01 Aug 30 closed at 10.80/00 percent from 10.80/85 percent
A bond maturing on 15 May 31 closed at 10.95/11.05 percent from 10.95/11.10 percent.
A bond maturing on 01 Oct 32 closed at 11.10/20 percent from 11.15/11.20 percent.
A bond maturing on 01 June 33 closed at 11.35/45 percent, from 11.35/40 percent.
A bond maturing on 15 Oct 34 closed at 11.60/70 percent from 11.70/75 percent. (Colombo/Aug21/2026)