The rufiyaa is pegged to the US dollar. The midpoint of the exchange rate is Rf12.85:US$1, and the rate is permitted to fluctuate within a band of ±20%. In recent years the currency has consistently grazed the weak edge of the exchange-rate band. The pandemic-induced disruption in tourism receipts since the onset of the pandemic has slowed the accumulation of the country's foreign-exchange reserves and pushed the black-market exchange rate above the official peg. The ongoing recovery, albeit slow and uneven, in international travel, along with partial debt relief, has lifted some of this pressure recently. Nevertheless, the peg remains relatively vulnerable given the scale of the country's debt.

Although there is a significant risk that the government will be forced to weaken the currency if foreign-exchange reserves remain under pressure over a prolonged period, our core forecast is that the peg will be maintained as tourism receipts recover in 2021-22, but that the currency will continue to test the weaker edge of the band. The authorities will fully utilise the US$150m swap line with the Reserve Bank of India (India's central bank) to reduce pressure on the peg.