CB devalues rupee to Rs.230 against dollar

• Says forex transactions would take place at levels which are not more than Rs.230 per US dollar
• However, not clear whether Rs.230 against US$ will be fixed or be allowed to free float 
• Hints that the devaluation was in line with the right-point policy package presented to govt. last Friday 
• The dollar has been selling at Rs.250 in unofficial market 

The Central Bank in a late night policy announcement yesterday devalued the rupee to Rs.230 against the US dollar despite Central Bank Governor Ajith Nivard Cabraal three days ago saying that the prevailing exchange rate was appropriate. 

“…greater flexibility in the exchange rate will be allowed to the markets with immediate effect. The Central Bank is also of the view that forex transactions would take place at levels which are not more than Rs. 230 per US dollar,” a brief Central Bank statement said.

It also hinted that more flexibility in the exchange rate was allowed to complement the eight-point policy package the Central Bank presented to the government last Friday to resolve the ongoing forex crisis. 
The monetary authority also raised policy interest rates by 100 basis points on Friday to arrest soaring inflation and address the foreign exchange crisis. 

“Considering the severity of the external shocks and recent developments in the domestic front, the Monetary Board of the Central Bank of Sri Lanka announced a comprehensive policy package on 04 March 2022 with the view to counter such economic headwinds. 

The Central Bank also indicated that it will continue to closely monitor the emerging macroeconomic and financial market developments, both globally and domestically, and will stand ready to take further measures as appropriate, with the aim of achieving stability in the fronts of inflation, the external sector, the financial sector, and real economic activity,” the Central Bank statement said.

Although the Central Bank maintained the official exchange rate at Rs.200-203 levels the dollar has been selling at Rs.250 levels in the unofficial market. 

However, economic analysts opined that the 15 percent depreciation announced yesterday was a step in the right direction, as devaluation should be done gradually avoiding a sudden shock to the economy. 

The Central Bank’s exchange rate fixing was seen as a key reason for the significant decline in worker remittance income in the last several months. January remittance income fell over 60 percent to Rs.259 million.