"If the element of speculation goes beyond a tolerable level, that is the time the market should intervene not by just simply releasing foreign exchange, (but) probably with the announcement of two rates. If that is what speculators are looking for, the government is quite competent in managing it," P. B. Jayasundera said.
He said the currency should stabilise below 125 rupees. It has slumped 12.3 percent since the government stopped intervening in February, touching a record low of 133.5 to the dollar last Wednesday, though by Monday it had recovered to just over 130.
"I honestly can't see any rationality behind the behavior of either in the exchange rate or interest rate," he said.
Market interest rates have also been on a rising trend, with currency dealers saying the treasury yields have jumped because of speculation over further currency depreciation.
Usually, interest rates are set by the central bank, but the government in the past has adjusted them through state-owned banks.
Sri Lanka has allowed the rupee to be determined by the market since Feb. 9 after the central bank spent more than $2.6 billion since last June to defend the currency, depleting foreign exchange reserves by a third.
On Nov. 19, the government allowed a 3 percent devaluation.
The central bank has raised key policy rates twice to two-year highs and restricted credit growth to 18 percent compared to last year's 35 percent, trying to slow imports and reduce pressure on the exchange rate.
The government also has raised fuel and electricity prices along with the tax on imported vehicles, which accounted for $1.7 billion of the total $20 billion import bill last year.
"There is no economic or fundamental reasons for the rupee to go beyond 125 a dollar. There is no reason why the rate goes beyond this because the policy actions are already in place," Jayasundera said.
But traders said that until they see more dollar inflows, the rupee will fall further.
"The central bank should allow the market to trade some dollars rather than mopping up everything to increase reserves," said a currency dealer on condition of anonymity.
Other dealers said the market did not react to Jayasundera's comments as they doubted the authorities would implement such measures any time soon.
The central bank is building up the country's reserves to meet a target in June set by the International Monetary Fund to meet requirements for a $2.6 billion loan.
FROM: REUTERS
