Sri Lanka Fights to keep Rupee Stable

rupee

* Foreigners hold $3.8 bln in Sri Lanka government securities

* Foreigners have mostly invested in long-term bonds-governor

* Says current fx policy appropriate to deal with situation

By Shihar Aneez

COLOMBO, July 4 (Reuters) – Sri Lanka can maintain exchange rate stability and there is little sign that outflows resulting from foreign investors selling government securities will pose a significant risk, the country’s central bank governor said on Thursday.

“We are well equipped to handle any possible outflow,” Central Bank Governor Ajith Nivard Cabraal told a Thomson Reuters Global Market Forum on Thursday. “We have shown that capability and capacity in the past.”

Currency dealers expect outflows to keep pressure on the rupee and a cut in Sri Lanka’s credit rating outlook to stable from positive announced on Tuesday by Moody’s could add to the bearishness.

Foreign investors, who hold around $3.8 billion in Sri Lankan government securities, began gradually retreating early last month as they have done in other emerging markets after the outlook for the U.S. economy improved, making U.S. treasury yields more attractive.

Foreign holdings in T-bonds have fallen 2.7 percent or 11.68 billion rupees ($89.43 million) in the four weeks that ended on June 26. Some foreigners have been shifting funds to short term T-bills, data showed.

The rupee currency fell 3.12 percent in June, with the central bank cushioning the fall by selling dollars to curb volatility, and the currency has stabilised near an eight month low of 130.60/70 per dollar.

“Our current (exchange) rate seems to be holding reasonably well in order to ensure that the Sri Lankan economic activity is supported,” Cabraal said.

Cabraal said most foreigners were invested in long term paper, having put money in at a time when Sri Lanka’s economic fundamentals were in worse shape. He said the scale of foreign selling was less than had been seen elsewhere.

“There is little risk of huge foreign selling of T-bonds. Therefore, we believe that our currentexchange rate policy would be appropriate to deal with the situation,” he said. (Reporting by Shihar Aneez; editing by Simon Cameron-Moore)

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