Sri Lanka rupee slips after rate cut; dealers expect downward pressure

COLOMBO: The Sri Lankan rupee edged down on Tuesday after the central bank surprisingly cut key policy interest rates by 50 basis points to multi-year lows.

The local currency could come under further pressure as big investors may start selling government bonds due to lower returns, dealers said.

The spot rupee was trading at 131.02/05 per dollar at 0505 GMT, weaker from Monday's close of 130.90/95, which was its highest since July 16.

Before the markets opened, the central bank cut key policy interest rates to spur economic growth, just three weeks after the International Monetary Fund advised it to hold rates steady.

"There'll be lot of pressure on the exchange rate as most of the wealthy investors might repatriate their money due to lower returns," a currency dealer said on condition of anonymity.

"Also, there could be more pressure on the inflation and the budget deficit as people might start spending more."

However, Central Bank Governor Ajith Nivard Cabraal said the rate cut decision was taken after considering the stability in the exchange rate and favourable inflation outlook in the near future.

Dealers said the fall was due to dollar demand by importers ahead of holidays, while exporters were holding on to see the direction after the central bank's move.

Both currency and stock markets will be closed for holidays on Wednesday and Friday.

Dealers had earlier expected the local currency to be stable and trade in a narrow range in the short term after the central bank governor said on Oct. 4 that the currency would "behave in a stable manner" in the next few months.

The rupee hit a record low of 135.20 on Aug. 28, but has managed to stem further losses since then.

Globally, the dollar, which tracks the greenback's performance against a basket of major currencies, was up about 0.1 percent, moving away from an eight-month low hit after the US government shutdown started earlier this month.

Sri Lanka's main stock index was up 0.09 percent, or 5.30 points, at 5,957.92 at 0550 GMT.