Rupee forwards edge down on importer dollar demand

Reuters: Rupee forwards eased slightly on importer dollar demand in a dull session on Thursday, while growing uncertainty after the announcement of new tax hikes weighed on the currency, dealers said.

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 on Tuesday, ahead of talks on a $1.5-billion loan it is seeking from the IMF. 

One-week rupee forwards, which act as a proxy for the spot currency, ended at 145.20/25 per dollar, weaker from Wednesday’s close of 145.15/20 per dollar.

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

“It was the normal import demand. Today there was not much of activity,” said a currency dealer, asking not to be named.

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

The new tax moves come a week after Fitch’s downgrade of Sri Lanka’s sovereign rating, and some dealers said the rupee would face further downward pressure due to seasonal importer demand. 

Finance Minister Ravi Karunanayake and Central Bank Governor Arjuna Mahendran, however, said the downgrade will not impact the country’s borrowing.

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. 961 million ($6.7 million) worth of Government securities in the week ended 2 March, data from the Central Bank showed, taking the total offloaded since 30 December to Rs. 35.9 billion.

Commercial banks parked Rs. 4.2 billion ($29.25 million) of surplus liquidity on Thursday, using the Central Bank’s deposit facility at 6.50%, while they borrowed Rs. 10.9 billion using the Central Bank’s lending facility at 8%, official data showed.