Sri Lankan rupee forwards ease in dull trade

Sri Lanka Rupee vs US Dollar

Sri Lankan rupee forwards eased slightly in dull trade on Tuesday as importer dollar demand surpassed greenback sales by banks amid growing uncertainty after the announcement of new tax hikes weighed on the currency, dealers said.

One-week rupee forwards, which act as a proxy for the spot currency, ended weaker at 145.25/30 per dollar compared with Monday’s close of 145.20/25.

The spot did not trade below 143.90, seen as the central bank’s desired level.

“There was importer demand today,” said a currency dealer, asking not to be named.

Analysts said the rupee would also face downward pressure until some positive news as S&P on Thursday revised its outlook on Sri Lanka’s “B-plus” sovereign credit rating to negative, a week after Fitch downgraded its rating by a notch to “B-plus” with a negative outlook.

However, Central Bank Governor Arjuna Mahendran said he hoped the rating agencies’ negative view on Sri Lanka’s credit rating would change after negotiations this month over an International Monetary Fund (IMF) loan.

Sri Lanka will raise value added tax (VAT) and reintroduce capital gains tax to break out of a debt trap, Prime Minister Ranil Wickremesinghe said last week, ahead of talks on a $1.5-billion loan it is seeking from the IMF.

Dealers also said policy uncertainty is deepening with the new taxes, and the capital gains tax may discourage foreign investors.

The downgrade will be of concern to international investors and market players, analysts said, adding it would push up the cost of government borrowings in the international market, putting pressure on the rupee.

Foreign investors sold 20.6 billion rupees ($142.27 million) worth of government securities in the week ended March 9, data from the central bank showed, taking the total offloaded since Dec. 30 to 56.6 billion rupees.

Commercial banks parked 12.985 billion rupees ($89.68 million) of surplus liquidity on Tuesday, using the central bank’s deposit facility at 6.50 percent, while they borrowed 2.092 billion rupees using the central bank’s lending facility at 8.00 percent, official data showed.

The central bank’s net holding in government securities fell by 1.203 billion rupees, data showed. ($1 = 144.8000 Sri Lankan rupees)