CB expects middle spot exchange rate to strengthen rupee exchange rate

The Central Bank (CB) expects the recently introduced middle spot exchange rate to strengthen the rupee exchange rate and to ease the liquidity pressures in the domestic foreign exchange market.

With effect from May 13, the CB introduced a middle rate based on the weighted average spot exchange rate of the USD/LKR interbank transactions, with a variation margin on either side of the middle spot exchange rate, for the licensed banks. “This measure, among others, is expected to help strengthen the exchange rate, thereby easing liquidity pressures in the domestic foreign exchange market in the period ahead,” the CB said.

The CB plans to announce the permitted USD/LKR variation margins before opening of the market.

The daily guidance middle rate was set at Rs.360 per US dollar while variation margin was set at Rs2.60 on May 13.

The banks are requested to apply only reasonable margins in determining the rates applicable for their customer transactions. Further, forward rates are also required to be consistent with the inter-bank market spot rates, according to the new direction. Further, the banks are prohibited from charging above 3 percent rupee value of transactions as fees or commissions.