INTERVIEW-UPDATE 1-Sri Lanka cbank sees weak rupee recovering to 125

Tue May 22, 2012 5:30pm IST

(Adds quotes, details)

By Shihar Aneez and John Chalmers

COLOMBO May 22 (Reuters) - Sri Lanka's central bank expects recent measures it has taken to boost the rupee will help the currency recover to below 125 to the U.S. dollar, but it is not targeting a particular level, Governor Ajith Nivard Cabraal told Reuters on Tuesday.

The rupee is hovering around 129-130 despite a warning from the Treasury Secretary last month that the authorities would intervene in the market if it did not appreciate to 125.

"Actually we don't have a target as such," Cabraal said. "We don't necessarily have a number in mind but our own assessment is that it should settle below the 125 rupee mark."

However, he said further steps to curb market speculation, which the authorities say has caused an unwarranted depreciation, could not be ruled out.

"We would probably be watching the situation carefully to see whether it needs any further adjustment, but our assessment right now is that we won't need to," he said, when asked if fresh measures to counter speculative trading were needed.

The rupee has fallen 11.9 percent since the central bank halted open market interventions on Feb. 9, after it had defended the currency with more than $2.6 billion in the second half of last year.

An over-valued rupee and low interest rates caused the country's trade deficit to more than double to $9.7 billion in 2011 and turned the balance of payments from a surplus to a $1 billion deficit, prompting the International Monetary Fund (IMF) to withhold a loan payment last August.

The IMF approved the delayed tranche of a $2.6 billion loan to Colombo in April with waivers after the country adopted a more flexible exchange rate policy and took measures to avert a balance-of-payments crisis.

To deal with the twin deficits, the central bank has taken several steps since February.

It has raised its key policy rates twice to two-year highs, allowed flexibility in the exchange rate, restricted credit growth and taken stringent measures to curb speculative trading in the rupee.

"It is really not a fixed exchange rate that we will be seeing in the future," Cabraal said.

"We would see some fluctuation depending on the timing, depending on the flows at different times, depending on our own appetite to absorb and supply."

He said an increase in policy rates was not necessary now as the measures taken so far have already yielded some encouraging signs of an "appreciable cut-back on imports".

(Editing by Kim Coghill)

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