Sri Lanka’s Central Bank (CB) yesterday barred banks from entering into new forward foreign exchange contracts for three months with immediate effect to contain excess volatility in the foreign exchange market.
The Indicative USD SPOT Exchange Rate yesterday rose to Rs 196.8 per USD from Rs.185.39 at the beginning of the year in the domestic inter-bank foreign exchange market.
“In view of the need to avoid excess volatility in the foreign exchange market and the impact on banks’ risk management, licensed commercial banks are hereby informed to refrain from entering into forward contracts of foreign exchange for a period of three months with immediate effect,” Central Bank Governor W D Lakshman stated.
The forward contract was a key derivative instrument in the country’s foreign exchange market which was aimed at helping to minimize the risk of exchange rate volatility, which remains popular among exporter in converting their export proceeds.
Last week, the average daily Interbank Forward Volume rose $ 43.40 million from $ 38.91 million a week back and $28.85 million a year ago.
The three-month forward contracts were trading at Rs 195.08 per USD last week.
The Outstanding Forward Volumes was down to $1.67 billion as of 21st this month from $ 1.77 billion a year earlier, and $1.81 billion a year earlier.