Sri Lanka rupee lose some recent gains in forward market
COLOMBO (EconomyNext) – Sri Lanka’s three rupee weakened in the forward dollar market Friday losing some of the gains made after learning that only 650 million US dollars were raised from a sovereign bond sale, dealers said.
The 3-month forward dollar which closed at 137.60/80 rupee levels Thursday, moved up to 137.50 rupee levels in intra-day trading Friday before again weakening to 137.75/85 levels dealers said.
The rupee which fell to a record 138.50/139.00 to the US dollar in the 3-month forward market Wednesday started to recover as news that a sovereign bond was being marketed filtered to the domestic market.
Foreign investors were also seen buying rupee bonds.
The 650 million US dollar sale however failed to re-assure exporters who were holding back dollars in the expectations of a greater depreciation.
Inflows to the Treasury also fails to give a lift to the market as they are usually surrendered to the Central Bank to create fresh liquidity without being sold in the open market before the liquidity is generated, unlike exporter and remittance dollars.
Analysts have identified surrendering fiscal dollars as an operational procedure which worsens the credibility of Sri Lanka’s dollar peg in times of uncertainty.
Sri Lanka rupee has come under pressure from higher state and private credit from the last quarter of 2014. Borrowing abroad reduces domestic credit, but the currency still has to be defended when the converted dollars are spent generating imports.
Analysts who watch liquidity levels say in May net outflows may not have been heavy though there is uncertainty due to controls imposed by the Central Bank which was promoting exporter hold-backs.
The Central Bank also withdrew over 20 billion rupees of excess liquidity from money markets in May safeguarding foreign reserves. Permanently sterilized rupee liquidity cannot be loaned and therefore cannot be used for imports.