The Secretary to the Treasury has told reporters that Sri Lanka may revert back to intervening in the country’s exchange rates, after the fast falling rupee hit record lows this week, leaving Sri Lankan officials perplexed.

P. B. Jayasundera told reporters,

"I honestly can't see any rationality behind the behaviour of either in the exchange rate or interest rate."

"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."

The rupee has fallen 12.3 percent since February, after the government gave in to IMF pressure and halted their policy of artificially propping up the rupee. Sri Lanka is estimated to have spent more than $2.6 billion to help support the value of the rupee, depleting its reserves by almost a third.

See our earlier posts:

Sri Lanka’s emerging economic crisis (18 Mar 2012)

Prices rise as Mahinda Economics unwinds (16 Feb 2012)

Mahinda Economics (21 Sep 2011)

It hit a record 133.5 to the dollar last week, but has since recovered slightly to just over 130. However, Jayasundera was wary of the ruppe falling to the 125 to the dollar mark, stating,

"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."

Meanwhile, Sri Lanka may delay plans to stop the supply of dollars to meet oil import bills, originally set for May. The plans would have forced the state-owned Ceylon Petroleum Corporation to buy dollars from the market rather than the state-owned Central Bank, increasing pressure on the rupee.

Central Bank Governor Ajith Nivard Cabraal, speaking on the increased demand for dollars from importers as the rupee slid, said,

"For the sake of stability, if we feel we need to extend a decision, we will do that, including (supplying dollars for) oil bill payments."

"What we have found out is some dealers push up the exchange rate without any proper underlying transactions.”

“It is against the exchange control act. We are studying these speculating dealers and we will take action against them."