UPDATE 1-S.Lanka cenbank says will keep protecting rupee

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By Shihar Aneez

COLOMBO Oct 10 (Reuters) - Sri Lanka's central bank will keep protecting the rupee against the U.S. dollar to maintain stability amid an unprecendented global financial crisis, Central Bank Governor Ajith Nivard Cabraal said on Friday.

The central bank has been blocking the local currency's fall by pumping over $250 million into the market since early September through a state-owned bank at a level of 108.00 rupees to the dollar, analysts and currency dealers said.

Most dealers said it would have fallen to 109.00 barring the intervention. "We are looking at stability," Cabraal told Reuters. "We are still within our limits of interventions. The central bank is taking steps which are long-term, which have impact on long-term stability. This is one of such actions."

Cabraal gave no deadline to stop intervention, but said a stabilised rupee level would govern the decision.

In the past he has said the bank would step in to prevent rapid fluctuations, and said the move was no different than what other central banks were doing now.

"We are looking after Sri Lankan stability in this global turmoil that is taking place," he said. "The Federal Reserve is today giving unsecured loan to the market. The Bank of England is giving money to 12 banks, so that they can recapitalise."

Dealers were critical of the intervention, saying the central bank should let the currency move on its own accord to balance the needs of importers and exporters.

"There is no logic behind this protection. All other economies are allowing their own currencies to fall without any intervention as the dollar has appreciated recently. This will make our exporters less competitive," said one dealer who spoke on condition of anonymity.

An official at the Department of International Operations, speaking on condition of anonymity, told Reuters the gross official foreign reserve as of Friday was $3.30 billion. He declined to comment on the figures at the beginning of September. The Central Bank on Sept. 17 said the gross official foreign reserve at the end of July stood at $3.56 billion.

The government is under heavy pressure to stem annual inflation that hit a record high of 28.2 percent in June and curb the residual shock of record high oil and food prices that hit earlier this year, drastically increasing the cost of living.

Cabraal brushed off the dealer criticism.

"All over the world today, central banks and the markets are yearning for stability. When stability is in our market, why are people are getting upset? Do they also want turmoil like everybody else?"

Up to end August, the central bank had bought $350 million from the market by pumping local currency to prevent the rupee's appreciation, due to high dollar inflows from foreign loans and sales of treasury bond and bills by foreign investors. (Editing by Bryson Hull)