Sri Lankan rupee forwards steady; seen falling on economic woes

COLOMBO: Sri Lankan rupee forwards ended steady on Friday as late inward remittances and exporter dollar conversions offset importer dollar demand amid growing uncertainty after the announcement of new tax hikes, dealers said.

One-week rupee forwards, which act as a proxy for the spot currency, ended steady at 145.55/65 per dollar.

The spot did not trade below 143.90, seen as the central bank's desired level.

"There was some importer demand and the forwards fell. But exporter conversions came in because the forwards fell to attractive levels," a currency dealer said, asking no to be named.

Analysts said the rupee would face downward pressure until any positive news.

S&P revised its outlook on Sri Lanka's "B-plus" sovereign credit rating to negative on March 10, a week after Fitch downgraded its rating by a notch to "B-plus" with a negative outlook.

Dealers also said policy uncertainty is deepening with the new taxes, and the capital gains tax may discourage foreign investors.

Sri Lanka will raise value added tax (VAT) and reintroduce capital gains tax to break out of a debt trap, ahead of talks on a $1.5-billion loan it is seeking from the IMF.

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 20.6 billion rupees ($142.27 million) worth of government securities in the week ended March 9, data from the central bank showed, taking the total offloaded since Dec. 30 to 56.6 billion rupees. Commercial banks parked 17.405 billion rupees of surplus liquidity on Friday, using the central bank's deposit facility at 6.50 percent, while they borrowed 1.750 billion rupees using the central bank's lending facility at 8.00 percent, official data showed.

The central bank's net holding in government securities increased by 7.505 billion rupees, data showed.

<Center><b><i>Copyright Reuters, 2010</b></i><br></center>