The rupee strengthened against the dollar to Rs. 114.25 yesterday and dealers speculate the Central Bank would allow the rupee to further appreciate gradually before closing around the 113 mark by the end of the year, somewhat nearer to where the rupee began at the beginning of the year.

"The rupee has been gaining against the dollar since the beginning of the week. The overnight rate on Monday was 114.65 which further strengthened to 114.35 during the day," a dealer said.

Dealers said the Central Bank again readjusted the dollar peg to Rs. 114.25 last morning.

The Central Bank has been preventing the rupee from appreciating after foreign currency inflows increased after the war ended in May and kept the exchange rate stable at around the 114.80 mark for several months—this helped it build reserves and also give exporters some breathing space with a weaker rupee.

"We believe the Central Bank would gradually allow the rupee to appreciate to about the 113 range against the dollar. If left alone, the rupee could appreciate to as much as 100 but then this would badly hurt exporters and the Central Bank does not want this to happen," another dealer said.

Two other dealers the Island Financial Review spoke to said that the exchange rate would reach the Rs. 113 range against the dollar by the year end.

"Considering the 114.80 peg that was maintained for a long time it would seem as if the rupee would have appreciated by the end of the year. But this may not be the case.

"The year began with the rupee at the 113 range—the exchange rate on January 5 was 113.20 against the dollar—so by the end of the year, the rupee would probably not gain at all, or perhaps depreciate by one percent," a dealer said.

Dealers also said with elections around the corner, authorities would strengthen the rupee to a certain extent so consumers could benefit from lower prices of imported items.

Last week the IMF Sri Lanka Resident Representative, Dr. Koshy Mathai, said in view of increased foreign currency inflows, the Central Bank had managed the exchange rate sensibly by keeping the rate stable at 114.80, stalling the appreciation of the rupee which benefited exporters and helped build the country’s foreign currency reserves.

Speaking to the press via teleconference, Dr. Mathai went on to say the Central Bank was now in a position of not knowing what to do with so many dollars built up in to reserves.