Sri Lanka softens forex restrictions

The central bank also lowered its benchmark repurchase and reverse repurchase rates by 50 basis points each to two-year lows of 8.5% and 11% respectively. It is the third round of cuts this year.

The central bank implemented controls limiting the amount of foreign currency banks could hold last October to temper exchange-rate volatility in the wake of the demise of Lehman Brothers, a now defunct investment bank. But Reuters, a news agency, reported Nandalal Weerasinghe, the central bank's chief economist, as saying that there was no reason for the controls to remain now that pressure on the exchange-rate had eased.

The rupee was depreciating up until May but the trend has reversed in the past few weeks on the back of a wave of foreign investment linked to the cessation of the civil war between the Sri Lankan authorities and the Tamil Tigers. The central bank noted that the capital inflows would further cheapen credit. "It is envisaged that these positive developments together with the policy measures taken by the Central Bank, would enable financial intermediaries to bring down their cost of funds further, thereby ensuring a rise in credit to the economy," the central bank said.

The central bank did not say when the controls would be lifted.