Sri Lanka's rupee hit new lows near 134 to the US dollar in the spot market yesterday.

Excess rupee liquidity in the banking system rose to 10.8 billion rupees Tuesday from 7.5 billion rupees on Monday, indicating that the Central Bank was buying inflowing dollars and flooding the markets with rupees.

Any purchase by the Central Bank of dollars at a given exchange rate indicates that there is no 'shortage' of dollars but foreign exchange that could have hit the market have been pre-empted out, putting pressure on the peg.