May 30, 2012 / 7:42 AM / 5 years ago

INTERVIEW-Sri Lanka's cbank lowers outlook for ailing rupee

* Cbank sees fx stability around 132, down from earlier 125

* Rupee down 14 since cbank stopped interventions in Feb

* Cbank would intervene if oil bills put big pressure on rupee (Adds quotes, details)

By Shihar Aneez

COLOMBO, May 30 (Reuters) - Sri Lanka central bank expects the rupee to stabilise at current levels of around 132 to the dollar without intervention, a senior official said on Wednesday, abandoning its earlier stance where it had expected the currency to settle at a higher level.

The rupee was trading 132.20/132.40 per dollar at 0618 GMT on Wednesday. Both the central bank and the treasury had said only recently that they expected the currency to stabilise below 125 a dollar.

“We think that it will stabilise at these levels unless there is a large oil import bill,” Swarna Gunaratna, the central bank’s chief economist told Reuters in an interview.

“Even without intervening, the exchange rate has stabilised around 130-131. We don’t think that it will go to the 140 or 150 level. It will remain at these levels even without intervening. We want to look what is the trend if we are not intervening,” she said.

The bank spent $2.6 billion or a third of its reserves in five months starting in August last year, doggedly defending the currency, attracting the International Monetary Fund’s disapproval and delaying one tranche of a $2.6 billion IMF loan.

The central bank on Feb. 9 switched to a flexible exchange rate policy, vowing to not intervene except to meet unusually large oil bills. The rupee has plunged some 14 percent since then.

An IMF review mission will visit Sri Lanka next week to asses the $59 billion economy’s latest economic performance and, if satisfied, it may release the last tranche of the $2.6 billion loan in July, Gunaratna added.

She reiterated that the central bank will allow the market to determine the rupee level and will only intervene if there is heavy rupee volatility due to large oil bills.

“When there is a heavy pressure to the market due to large oil bill payments, we will support for them, though not for the total bill,” Gunaratna said, adding the central bank has already asked the state-run Ceylon Petroleum Corporation to find dollars from the market to finance its import bills.

Sri Lanka’s Treasury Secretary on April 30 threatened a return to intervention in the currency market and other measures if the fast falling rupee dropped beyond “tolerable” levels. But the central bank has still refrained from intervention. (Editing by Ramya Venugopal)

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