Central Bank to provide daily guidance to banks on foreign exchange rate

• A Fx rate band to be decided based on average inter-bank rate plus or minus margin
• Move aimed at ending excessive daily volatility in foreign exchange rate 
• Exporters barred from allocating dollars for imports except for their own 
• Both moves taken in consultation with recent engagement with banks’ Treasurers

In a fresh move to ease the excessive daily volatility currently prevalent in the dollar/rupee exchange market, the Central Bank will soon provide guidance to banks to follow when quoting rates for the importers and exporters, which will also prevent the latter from charging excessively high margins from the importers off the market. 

In a recent engagement the Central Bank had with banks’ Treasury officials, the latter has sought some guidance by way of providing a trading band for exchange rate from the Central Bank to ease the current high level of volatility in the exchange rate. 

In response, the Central Bank will provide a foreign exchange band developed using the average of the previous day’s interbank foreign currency market, plus or minus some margin, which takes the form of a few percentage points. Clear operating instructions would be issued soon by the Central Bank as to how this must be enforced, the Central Bank said yesterday. Central Bank Governor Dr. Nandalal Weerasinghe said this move would bring some stability to the domestic foreign exchange market by bringing down the excessive daily volatility seen at present, whilst allowing the free-market operations to continue.  

The initiative is also brought in to curtail the extremely high margins quoted by the exporters when allocating part of their export proceeds to importers. 

Although it is a violation of the current rules, exporters have been engaging in allocating part of their dollars for third party importers at rates agreed between exporters and importer, which are almost always much higher than the official rate. 

This practice puts upward pressure on the foreign exchange rate beyond what it should be. 
“We will ask banks not to entertain such requests by the exporters,” Dr. Weerasinghe said. 
Exporters are allowed to allocate dollars out of their proceeds only for their own imports and other stipulated expenses and commitments up to a month and the balance must be converted, out of which a 25 percent is sold to the Central Bank. 

The strict enforcement of the rules will ensure that dollars would be available to fund the essential imports such as fuel, cooking gas and medicine. 

Dr. Weerasinghe said they observe that importers somehow have been finding dollars to bring goods such as televisions, refrigerators, mobile phones and the likes, when the dollars could not be found for essential imports. 
He urged consumers also to defer such purchases if possible for another six months or so because the priority today is to have medicine, fuel, gas, etc. to run a working economy. 

Addressing the exporters, Dr. Weerasinghe said these measures are taken because their factory operations could get hampered, if the country cannot import fuel to provide them with electricity and also run their transport vehicles, which are of utmost importance.  “If the exporters run into trouble due to longer power cuts and other issues, then the economy would fall into deeper trouble,” he said. 

Exporters are already getting a much better deal at Rs.375 a dollar, compared to Rs.203 they got before the rupee devaluation. However, the domestic cost base has also risen in tandem with inflation running at levels, which have never been seen before.