(Bloomberg) — The Sri Lankan rupee posted its biggest single-day decline in more than 40 years, after a continued drain in the nation’s international reserves forced the central bank to relax its grip on the currency.
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The currency slid 12% to a record low of 227.86 against the dollar, following the Central Bank of Sri Lanka’s move to effectively devalue the currency on Monday. The 12% decline was its biggest since Nov. 16, 1977, when the currency slumped more than 40%.
“There was no choice other than to allow the exchange rate to move,” said Udeeshan Jonas, chief strategist CAL Securities, of the central bank’s guidance capping the rupee at 230 versus the dollar. The central bank had imposed a tight 201-203 range against the dollar for the currency since October to rein in Asia’s fastest inflation rate.
The central bank’s decision is positive for listed exporters, Jonas said, adding that most of the country’s importers were already buying dollars between the 230-240 range.
The central bank’s relaxation of the currency peg will help the South Asian nation free up dollars to pay for essential imports as well as aid the country in paying for a $1 billion bond due in July. Sri Lanka’s foreign-exchange stockpile fell to $2.31 billion in February, its lowest level since Nov. 2021. It was at $2.36 billion in January.
“We have given a guidance” on the rupee level, Central Bank Governor Ajith Nivard Cabraal said by phone Tuesday, adding that the new exchange rate policy is effectively a “float” of the rupee.
“We stand ready to take additional policy measures,” he said. “Global conditions have been quite volatile. We need to ensure that some measures are taken to respond to that volatility as well.”
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