Rupee forwards end steady on late dollar inflows

Reuters: Rupee forwards ended steady on Friday as late inward remittances offset early importer dollar demand, while 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 steady at 145.20/25 per dollar.

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

“There was customer flow in the latter part of the day and we are not sure whether they were exporter (dollar) conversions or inward remittances,” said a currency dealer, asking not to be named.

Analysts said the rupee would also face downward pressure in the long run 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 on Tuesday, 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 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. 24.044 billion ($165.94 million) of surplus liquidity on Friday, using the Central Bank’s deposit facility at 6.50%, while they borrowed Rs. 2.583 billion using the Central Bank’s lending facility at 8%, official data showed.

The Central Bank’s net holding in Government securities dropped by Rs. 26.5 billion, data showed.