Sri Lanka's Central Bank believes the rupee can strengthen to around 125 per U.S. dollar due to high foreign inflows into the economy, the head of the country's monetary authority said yesterday.

Since April, the Central Bank and Finance Ministry have repeatedly said the rupee should stabilise around 125 per dollar, given the macroeconomic policy fundamentals after a series of policy reforms this year, including a flexible exchange rate to avert a balance-ofpayments crisis.

However, the currency hit a record low of 134.30 on June 28, before stabilising around the current level of 132 and has fallen more than 16 percent since November last year.

“We still believe that the fundamentals will support a figure like 125,” Central Bank Governor Ajith Nivard Cabraal told Reuters, without giving a specific time frame. “The fundamentals we are moving towards will certainly support an exchange rate of that level.”

Cabraal said more capital inflows into foreign direct investments and equities and reduced outflows through stringent policy measures will help prevent an exodus of dollars, thus stabilising the rupee.

Sri Lanka has targeted $24.5 billion in foreign inflows including $11.7 billion of export revenue, $6.5 billion worker remittances from expatriates, $2.1 billion government of inflows and $2 billion of foreign direct investment.

“What we had envisaged are coming in - that set of (inflow) figures, supports an exchange rate of a rather more appreciated figure than what it is today. That's why we are confidently saying that.”

Cabraal said the inflows will help avert a balance of payments crisis this year.

“Definitely there will be a balance-of-payments surplus this year,” he said.

The sharp dip in the rupee along with a shortage of local farm products due to an extended drought have driven annual inflation in the $59 billion economy to a 42-month high of 9.8 percent last month.

“The current rise in inflation is not a result of demand driven factors,” Cabraal said.

“Those are all seen as not affected by policy rates. Credit growth is down, in line with what we had forecast. Imports have come down. So the demand side has been done. So we don't see a need to adjust policy rates.”

When asked if the Central Bank expects the inflation rate to rise beyond 10 percent, he said, “It's too early to say. But it is unlikely it will hit double digit because of some steps that have been taken by the government.”

The government has reduced import taxes of selected essential goods since mid-last month and Cabraal said supply shocks will taper off with expected monsoon rains next month.

(Source : REUTERS)