Speculation Drove Dollar Spike: Central Bank Chief Clarifies Rate Distortion

COLOMBO (News 1st); Sri Lanka’s Central Bank has moved to reassure the public over recent volatility in the foreign exchange market, with Governor Dr. P. Nandalal Weerasinghe stating that fluctuations in the rupee were driven largely by speculation and temporary market distortions rather than any fundamental instability.

Responding to concerns raised by journalists regarding public commentary on money printing and deviations from official exchange rates, the Governor clarified that last week’s developments originated from unusual activity between commercial banks and their customers, rather than the interbank market itself.

He explained that under normal conditions, exchange rates in the interbank market, where commercial banks trade among themselves, serve as the benchmark, with customer rates typically fluctuating slightly above or below depending on buying and selling margins.

However, recent days saw a divergence from this pattern.

According to Dr. Weerasinghe, heightened speculation and panic-driven demand for foreign currency, particularly linked to import-related concerns, caused transactions outside the interbank market to occur at significantly inflated levels. While the interbank rate hovered around Rs. 320 to Rs. 330 per US dollar, some commercial bank transactions with customers were reported as high as Rs. 354 and Rs. 346, reflecting a clear market distortion.

“This was not aligned with normal market behaviour,” the Governor noted, pointing out that such deviations prompted the Central Bank to step in with corrective measures.

Discussions were held with bank treasurers, while targeted interventions were implemented to restore stability and improve liquidity within the market.

Following these steps, the Central Bank observed a rapid normalisation of conditions.

The interbank market regained functionality, liquidity levels improved, and exchange rates began to realign. By the beginning of this week, rates had stabilised at around Rs. 323 per US dollar, with both interbank and commercial bank rates moving in tandem.

Dr. Weerasinghe stressed that the Central Bank’s actions were not aimed at artificially controlling the currency, but rather at preventing excessive volatility and ensuring orderly market conditions. He emphasised that interventions were limited and carefully calibrated, noting that recent measures included only minimal dollar purchases to smooth fluctuations rather than resist market forces.

He further noted that the exchange rate remains fundamentally driven by supply and demand dynamics, and the recent stabilisation reflects improved confidence and balance between buyers and sellers in the market.

The Governor expressed optimism that the current stability would continue, highlighting that both importers and exporters are now operating within a more predictable environment. He also reiterated that the Central Bank remains vigilant and ready to act, if necessary, to maintain stability without undermining market-driven mechanisms.