Central Bank’s recent dollar purchases explain upward pressure on rupee

• In May alone, CB purchased US $ 662.50mn and sold nothing, taking cumulative five months’ net purchases of dollars to US $ 1.671bn

The Central Bank’s significant dollar purchases from the market in recent months have shed light on the recent appreciation pressure faced by the rupee. 
However, in June, the rupee relinquished some of its gains, following the Central Bank’s decision to cut policy rates. Further, the lifting of import bans on approximately 300 additional goods further impacted the currency’s performance.

In May alone, the Central Bank purchased as much as US $ 662.50 million and sold nothing, taking the cumulative five months’ net purchases of dollars to US $ 1.671 billion, according to the Central Bank data.
According to Central Bank Governor Dr. Nandalal Weerasinghe, the amount of dollars purchased from the domestic market in May reached its highest level in recent history.

What was purchased in May also reflected a substantial increase from the US $ 147.75 million purchased in April.
This months-long streak in remaining a net buyer of dollars became possible specially from the gradual increment seen in the tourism and remittance flows and the savings from the debt service suspension in last April.

The subdued imports also gave the Central Bank the wiggle room to collect foreign currency to rebuild reserves, which fell below US $ 50 million at the onset of the economic crisis last year. 
By the end of May, the accumulated foreign currency reserves stood at US $ 3,483 million, including the US $ 1.4 billion equivalent yuan-denominated Chinese swap line, which has restrictions in usability. 

The dollar purchases in recent months helped the rupee to gain 24.2 percent in the year through May after losing its value by as much as 80 percent in 2022. 
However, the rupee experienced a partial reversal of those gains in June, resulting in a narrowing of the year-to-date appreciation to approximately 17.6 percent by June 28, the final market day of the month. 
This reversal was largely influenced by US $ 80 million released by the Central Bank to Ceylon Petroleum Corporation for oil imports.
This reflects how fragile the country’s external sector is even after more than a year since the country fell into its worst currency crisis.