Rupee forwards edge down; IMF statement raises concerns

Reuters: The rupee edged down on Monday on importer dollar demand though banks selling the greenback prevented a further fall amid concerns triggered by an International Monetary Fund statement urging the country to reduce its fiscal deficit, dealers said.

Rupee forwards have been active since 27 January as there has been little trading in spot currency with banks reluctant to trade below the 144.00 level amid moral suasion by the central bank.

One-week rupee forwards, which act as a proxy for spot, ended at 144.28/35 per dollar compared with Friday’s close of 144.20/30.

The IMF on Friday urged Sri Lanka to take steps to reduce its fiscal deficit and raise tax revenues to help improve its balance of payments.

“This means you need to raise interest rates and local taxes in the near future,” a currency dealer said asking not to be named. “But if you implement them, there could be political implications.”

However, most of the dealers said an increase in interest rates and taxes will help reduce the pressure on the exchange rate and IMF’s backing through a loan would help to instil confidence in foreign investors in the long term.

Dealers also said the Central Bank will not be able to hold the rupee at the same level without strong dollar inflows.

The Central Bank usually intervenes in times of high volatility though it floated the rupee on 4 September.

The rupee is under pressure despite a 150-basis-point increase in commercial banks’ statutory reserve ratio from 16 January. The Central Bank kept its key policy interest rates unchanged on 25 January.

Commercial banks parked Rs. 62.052 billion ($432.93 million) of surplus liquidity on Monday, using the central bank’s deposit facility at 6%, official data showed.

The Central Bank’s net holding of Government securities increased by Rs. 3.702 billion, official data showed.