Cabraal says if rupee depreciation is too steep, “fix” it at value deemed appropriate

Former Central Bank Governor Ajith Nivard Cabraal, who is at the receiving end for the country’s botched rupee float, yesterday said the new Central Bank governor and Finance Ministry secretary can change the present “flexible” exchange rate policy and “fix” it at a value that they deem appropriate. 

He said this responding to the Mirror Business story titled ‘Rupee float was a unilateral decision by Cabraal’, which appeared on Monday.

Following is the full text of the response.  On March 7, 2022, the Monetary Board decided to “allow the market to have a greater flexibility in the exchange rate with immediate effect and communicate that the Central Bank is of the view that forex transactions would take place at levels which are not more than Rs.230 per US dollar”.  On the same day, an announcement was made to the media in line with the above decision. Refer:

https://www.cbsl.gov.lk/sites/default/files/cbslweb_documents/press/pr/press_20220307_policy_package_to_support_greater_macroeconomic_stability_e.pdf
From the above it will be clear that, while the Monetary Board had, as a market guidance, expressed its “view” as to the level at which forex transactions would take place, a clear decision had been taken to allow for the flexibility of the Sri Lankan rupee in the forex market.

Previously, on September 6, 2021, Governor Prof. W.D. Lakshman and the Monetary Board had “fixed” the exchange rate of the LKR at 200 per US dollar on September 6, 2021, when the LKR had depreciated to 210 per US dollar. Thereafter, such policy was followed for about 6 months until March 7, 2022, at which point of time, the exchange rate policy was changed by the Monetary Board to follow a “flexible” exchange rate policy, as above. 
Nevertheless, within a short period of time thereafter, forex market transactions took place at levels higher than such indicative level and still continue at elevated levels.

It would also be noted that from April 8, 2022 onwards, the Monetary Board under the new governor and new secretary, Treasury have continued with the exchange rate policy as above, without “fixing” a specified exchange rate, as was the case immediately prior to March 7, 2022. 

In that context, it would follow that if the present governor and Monetary Board and/or the government takes the view that the depreciation of the LKR beyond a certain level is unacceptable, they could, at any time, change the present “flexible” exchange rate policy and “fix” the exchange rate at a value that they deem appropriate.