* President assures devaluation is one-off-cbank
* Finmin, cenbank opinion on rupee differs
* Policy rates still appropriate-Cabraal
By Shihar Aneez
COLOMBO, Nov 25 (Reuters) - Sri Lanka’s central bank on Friday said it will sell dollars from its foreign exchange reserves to defend the rupee currency after it was devalued 3 percent this week and may allow appreciation if inflows push back depreciation pressure.
Central Bank Governor Ajith Nivard Cabraal said President Mahinda Rajapaksa has said the devaluation is a one-off change, after he ordered the central bank to implement it during his 2012 budget presentation on Monday.
“I had a discussion with the president and I have got his assurance on that,” Cabraal told Reuters. “We have moved more than what we should have.”
The central bank dropped the rupee to 113.90 from 110.40 a dollar on Tuesday and now is maintaining a narrow dollar band of 40 cents between 113.50/90, which Cabraal says is ‘comfortable’.
Contrary to Cabraal’s view, Finance Ministry Secretary P. B. Jayasundera on Thursday told Reuters the exchange rate should be driven by market forces, except in cases of volatility.
Jayasundera and Cabraal are the two most influential economic policymakers in Sri Lanka, except when Rajapaksa steps into economic policy in his role as finance minister.
Rajapaksa’s surprise devaluation announcement shocked the markets and surprised many central bank officials, who were not prepared to implement the directive.
It is the second time since 2009 the island nation’s fiscal authority, the finance ministry, has made a monetary policy decision that overrode the central bank’s authority. The finance ministry raised benchmark state bank interest rates in 2009 without informing the central bank first.
The central bank has spent more than $1 billion this year to defend the rupee, while Asian peers let their currencies drop. That prompted the International Monetary Fund (IMF) to withhold the latest tranche of a $2.6 billion loan, and warn the exchange rate policy was unsustainable.
It praised the devaluation as a “step in the right direction.”
“We are giving back the market some of the reserves we have accumulated and I think that is the way you have to make use of your reserves. If you are not using the reserves, what is the use of keeping reserves?” Cabraal said.
The central bank has said it was holding the rupee steady on the expectation of foreign capital inflows. Cabraal has directed local banks to raise $800 million from cheaper foreign sources, and said three banks already have secured $275 million.
Despite the upward pressure on inflation and interest rates, Cabraal said the monetary policy rates are still appropriate, but the devaluation has increased the country’s debt by 74 billion rupees ($650 million).
On Wednesday, a day after the devaluation implemented, benchmark 91-day T-bill yields jumped 44 basis points, while yields in 182- and 364-day T-bills rose 64 and 91 basis points respectively from the previous auction. (Editing by Bryson Hull)