Following a week of sharp fluctuations in the foreign exchange market, Central Bank of Sri Lanka (CBSL) Governor Dr. Nandalal Weerasinghe explained the mechanics behind the sudden overnight drop in the US Dollar rate, attributing the stabilization to targeted interventions by the regulator.

According to Dr. Weerasinghe, exchange rate movements observed last week were primarily driven by “excessive demand” fueled by market speculation and panic, rather than fundamental economic shifts.

The Governor highlighted a growing disconnect between the two primary segments of the foreign exchange market: the interbank market (where banks trade with each other) and the retail market (where banks trade with consumers and businesses).

“Because of the uncertainty surrounding the exchange rate and certain speculations, those who want to import started to buy dollars from banks at whatever rate they liked,” Dr. Weerasinghe explained.

While the formal interbank rate hovered around Rs. 330, panic-stricken importers began demanding dollars at drastically higher retail rates of Rs. 345, Rs. 350, and even Rs. 355 in an aggressive bid to cover their upcoming import costs, he said. This speculative behaviour caused the retail rate to aggressively deviate from the interbank baseline, threatening market stability.

“The interbank market rate and the commercial rate should have been in between, but it moved away. Within this situation, we decided to make interventions,” he explained.

Following these regulatory interventions and collaborative discussions with the Treasury, trading conditions have visibly smoothed out, he added.