Sri Lanka Removes Currency Trading Band against Dollar. Central Bank Governor Says Intervention in Currency Market would be through supply and not based on Price

09th February 2012, www.bloomberg.com

Sri Lanka’s rupee fell the most since November and stocks plunged after the central bank said it was changing the way it manages the currency against the dollar.

Central Bank of Sri Lanka Governor Ajith Nivard Cabraal said that effective from today a trading band against the dollar would be removed. The monetary authority would now “intervene” in the currency market through “supply and not based on price,” he said.

The Sri Lankan rupee dropped 1 percent to 115.40 per dollar as of 3.03 p.m. in Colombo, according to data compiled by Bloomberg. That was the biggest decline since the currency was devalued on Nov. 22. The benchmark Colombo All-Share Index of stocks fell 2.3 percent.

“Although foreign investors may make a currency loss, the almost floating of the rupee will give them more clarity on the exchange rate in future investment decisions,” said Bimanee Meepagala, a Colombo-based analyst at NDB Aviva Wealth Management Ltd., the nation’s biggest non-state fund.

The move comes after calls by the International Monetary Fund for a more flexible exchange rate. Sri Lanka devalued the rupee by 3 percent in November to boost exports. The central bank narrowed the currency’s trading band against the dollar on Feb. 3 and Feb. 6 and today, prior to announcing its removal. The monetary authority raised benchmark interest rates for the first time since 2007 on Feb. 3 to contain credit growth and inflation in the $50 billion economy.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net

To contact the editor responsible for this story: Hari Govind at hgovind@bloomberg.net