Rupee forwards ease on importer dollar demand

Reuters: Rupee forwards ended weaker on Wednesday on importer dollar demand 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 at 145.45/55 per dollar compared with Tuesday’s close of 145.25/30.

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

Analysts said the rupee would 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.

Dealers also said policy uncertainty is deepening with the new taxes, and the Capital Gains Tax may discourage foreign investors.

Sri Lanka will raise Value Added Tax (VAT) and reintroduce Capital Gains Tax to break out of a debt trap, ahead of talks on a $1.5-billion loan it is seeking from the IMF.

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 Rs. 20.6 billion ($142.27 million) worth of Government securities in the week ended 9 March, data from the Central Bank showed, taking the total offloaded since 30 December to Rs. 56.6 billion.

Commercial banks parked Rs. 9.46 billion of surplus liquidity on Wednesday, using the Central Bank’s deposit facility at 6.50%, while they borrowed Rs. 8.09 billion using the Central Bank’s lending facility at 8%, official data showed.

The Central Bank’s net holding in Government securities increased by Rs. 6.02 billion, data showed.