Rupee forwards slightly weaker as IMF concerns weigh

Reuters: Sri Lankan rupee forwards edged down on Tuesday on importer dollar demand, while a statement from the International Monetary Fund urging the country to cut its fiscal deficit weighed on sentiment, dealers said.

Rupee forwards have been active since 27 January as there has been little trading in spot currency LKR=LK, 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 144.32/35 per dollar compared with Monday’s close of 144.28/35.

“There was importer demand today,” said a currency dealer asking not to be named.

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. 

Dealers said interest rates and local taxes would rise in the near future if the government implements IMF’s recommendations.

Most 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 instil confidence in foreign investors in the long term.

Dealers said the Central Bank would not be able to hold the rupee at the current level without strong dollar inflows.

The Central Bank usually intervenes in times of high volatility though it floated the rupee on 4 September 2015.

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. 45.2 billion ($314.00 million) of surplus liquidity on Tuesday, using the Central Bank’s deposit facility at 6%, official data showed.

The Central Bank’s net holding of government securities was down by Rs. 13.2 billion on Tuesday, official data showed.