May 9, 2017 / 9:43 AM / 3 months ago

UPDATE 1-Sri Lanka averse to rupee falling "too quickly" - c.bank chief

(Adds details, comments & context on rupee policy)

COLOMBO, May 9 (Reuters) - Sri Lanka's central bank does not want to allow the rupee to fall too quickly, Governor Indrajit Coomaraswamy said on Tuesday, but suggested further weakness in the exchange rate is on the cards as policy makers sought a competitive currency.

U.S. dollar inflows have helped the rupee stabilise after a sharp fall of around 14 percent in the last two years. The central bank, however, has been adjusting the spot rupee reference rate down, and the currency has fallen 1.7 percent so far this year.

"The key thing is to have a competitive exchange rate...We don't want to let it fall too quickly," Coomaraswamy told reporters in Colombo after the central bank held policy rates steady earlier in the day.

The central bank has allowed the currency to gradually depreciate since mid-December, revising its spot reference rate down multiple times as it sought to boost export competitiveness and spur a sluggish economy. It has said that defending the currency with foreign exchange reserves did not "seem sensible".

The rupee has been hit hard by outflow of foreign funds since the U.S. Federal Reserve started tightening rates as well as from twin balance-of-payments and debt crises.

Coomaraswamy said proceeds from Friday's $1.5 billion sovereign bond is expected by end-week, while another $450 million syndicated loan, which is "almost decided", is expected next week.

The spot rupee, which hasn't traded for four months due to indirect central bank intervention, resumed spot deals on Friday. It was not active on Tuesday. The central bank adjusted the spot reference rate to 152.10 from 151.90 last week.

Coomaraswamy said the central bank wants to reduce the gap between the spot and forwards by adjusting the spot reference rate downward, meaning there is more room for the rupee to decline .

"That shows where the rates should be. So we are going to gradually let the reference rate go a little bit," he said.

"We are trying to see whether we can compress that (gap) and let the reference rate move in the direction of what seems to be the market rate."

The central bank has targeted to boost foreign exchange reserves to $7.2 billion by the end of this year, up from the current $5 billion, through foreign borrowings and divestment of some state assets.

Coomaraswamy said the extra reserves could bolster its intervention firepower in the event of disorderly market moves.

Reporting by Shihar Aneez and Ranga Sirilal; Editing by Shri Navaratnam

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