Central Bank continues to remain net purchaser of dollars

The Central Bank has continued to purchase dollars from the banking sector as the dollar supply outstrips the demand for the greenback in recent times exerting upward pressure on the rupee.
According to data, the Central Bank purchased US$ 469.5 million in April and sold only US$ 50 million resulting in a net purchase of US$ 419.5 million for the month.

In March, the Bank purchased US$ 715.1 million, the highest purchases of foreign currency in a month in recent times.
In January and February, the Central Bank purchased US$ 245.3 million and US$ 240.0 million respectively, bringing the total for the first four months of the year to US$ 1,618.5 million.
The purchase of dollars results in the Central Bank releasing new rupees into the system but that doesn’t necessarily cause the increase of the money in circulation.
There are fears that the increase in money supply causes prices to rise as was seen from 2021. But they are largely misplaced as the demand in Sri Lanka remains in slack.

Data showed that the inflationary spiral in 2022 and the first half of 2023 were almost entirely caused by the supply squeeze, especially coming from the rise in global energy and other commodities prices before being exacerbated by sudden floating of the currency.
The dollar purchases by the Central Bank helps it to maintain the rupee, preventing large volatility.
If not for these purchases, the rupee may have appreciated well below 300 trading at present. The exporters are protesting against the continued appreciation in the rupee as it hurts their top-lines in rupee terms.  

Suspension of foreign currency debt, robust inflows from tourism and remittances and still benign imports help Sri Lanka to result in excess dollars.
The dollar purchases help the Central Bank to rebuild the foreign currency reserves to a formidable level.
By the end of April, the gross official reserves stood at just under US$ 5.5 billion, the highest since December 2020.