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Tuesday, February 7, 2012

Central Bank relaxes hold on rupee, falls for second day

Bourse keeps slipping

The rupee fell further on Monday as the Central Bank eased its intervention in the foreign exchange market, but demand still persists, dealers said.

The rupee fell 20 cents against the dollar on Monday to close at Rs. 114.30 against the greenback, but the Central Bank still continued to intervene in the market, selling dollars to prevent a sharp depreciation.

The rupee has fallen for the second consecutive day, down 40 cents since Thursday (Feb. 02) when the rupee closed at Rs. 113.90 against the dollar.

The Central Bank has sold more than US$ 2.5 billion since July to keep the exchange rate stable amidst severe import demand.

This intervention drained rupee liquidity from the banking system which was already exposed to high credit demand. The Central Bank had printed more than Rs. 300 billion in the past one and a half months in order to pump liquidity into the system, which invariably went in to further fuel demand.

Last Friday, the Central Bank said it would increase key policy interest rates to curb this demand and also allow a degree of flexibility in the exchange rate as the country stood in the verge of another balance of payments crisis, with reserves falling from US$ 8.1 billion in July 2011 to US$ 6.3 billion as at end December 2011, prompting Treasury Secretary Dr. P. B. Jayasundera to call for monetary policy tightening and a flexible exchange rate regime.

The IMF on Friday welcomed the Central Bank’s move to a more flexible exchange rate policy, and the US$ 2.6 billion standby facility programme could continue.

The IMF said pressures on the balance of payments, exchange rate and interest rates faced by the country were due to challenges faced by a ‘successful economy’. Economic growth continues to be strong it said.

Meanwhile, the Colombo bourse fell for the fifth consecutive day on selling pressure and liquidity constraints, with the hike in monetary policy rates less likely to help the equities market, dealers said.

The All Share Price Index fell 0.45 percent on Monday (Feb. 06), down 24.96 points to close at 5,561.43 while the Milanka Price Index fell 7.13 points to close at 4,805.99, down 0.15 percent.

Turnover reached a little more than Rs. 1.34 million with 25.3 million shares changing hands during the day way which saw 50 counters close in positive territory against 119 that closed in the red.

"Decliners outpaced gainers by over 3:1 as the indices continued to decline on selling pressure, with turnover dominated by trades on large cap counters COMB, DIST and JKH," John Keells Stockbrokers said.

Year-to-date, the Colombo Stock Exchange fell 8.45 percent on Monday; continuing its downward spiral as the second worst performing stock exchange in the world.

source - www.ft.lk