Rupee down 1.8% on importer dollar demand

• CB partially stops pumping dollars for oil bills-dealers\
• Dollar liquidity dips, inflows absorbed by CB - traders
• Bourse at near 3-week low; sees light volumes

(Reuters) - Sri Lanka’s rupee fell 1.8 percent on Tuesday as importers sought dollars to settle oil bills, with the central bank gradually refraining from pumping out dollars to settle such transactions, currency dealers said.

The rupee closed at 128.00, compared with Monday’s close of 125.65/75 a dollar.

“There is a liquidity crunch for dollars as the central bank has been absorbing all the dollars coming as inflows and slowly reducing dollar supply for oil bill settlements,” a currency dealer said on condition of anonymity.

The central bank, which is building up its depleted reserves, has already said it may stop supplying dollars to pay for oil import bills from May, its latest move to allow more rupee flexibility after it refrained from intervening in foreign exchange markets in February.

Central Bank Governor Ajith Nivard Cabraal said the monetary authority has been allowing the oil bills to the market already.

“We have never said that we will be covering the oil bills fully,” Cabraal told Reuters.

Currency dealers said they are still uncertain on the outlook for the rupee despite a central bank statement on Monday that the country will see a $1.2 billion surplus in balance-of-payments this year through increased inflows and reduced outflows.

The currency has risen 2.8 percent since hitting a record low of 131.60 on March 19, but overall has fallen 10.7 percent since the central bank stopped defending it on Feb. 9. The stock market fell 0.4 percent or 20.78 points to 5,392.34, its lowest since March 22, in light trading volume amid holiday mood.

Both stock and money markets will be closed on Thursday and Friday for traditional new year holidays in Sri Lanka.

The day’s turnover was 202.8 million Sri Lanka rupees ($1.61 million) well below this year’s daily average of 1.33 billion rupees.

Foreign investors were net sellers of 2.8 million rupees worth of shares, but they have bought a net 21.1 billion rupees worth shares so far in 2012.

The Colombo bourse is one of the worst performers this year among Asian markets, losing 11.2 percent.