COLOMBO: The Sri Lankan rupee came off early falls to close firmer on Wednesday as dollar selling by foreign banks in late trade outpaced importer demand for the US currency, dealers said.
They said the market is concerned that the downward pressure on the rupee is likely to rise due to a fall in short-term government bond yields, a day after the International Monetary Fund (IMF) called for more monetary policy tightening and measures to curb strong credit growth.
A fall in T-bill yields, which move in tandem with market interest rates, will increase the demand for cheap credit and downward pressure on the currency, dealers said.
The spot rupee closed at 153.65/75 per dollar after hitting a low of 153.82/85 in early trade, dealers said. It had closed at 153.75/80 per dollar on Tuesday.
Dealers said there was huge liquidity in the market and that the yields had fallen in the last few days.
"Monetary tightening is good to ease the downward pressure on the rupee," a currency dealer said asking not to be named.
Analysts expect the currency to depreciate 4 percent this year. It has already fallen 2.6 percent so far in 2017.
The IMF, which completed its second review of a $1.5 billion loan on Tuesday, said the country's performance under its programme has been "broadly satisfactory".
The completion of the second review will enable the IMF to release a third tranche of aid of about $167.2 million, bringing total disbursements under the arrangement to the equivalent of about $501.5 million.
Central Bank Governor Indrajith Coomaraswamy said on Monday the rupee was still "over-valued" and that the central bank was still buying dollars to avoid any appreciation.
He told Reuters that the central bank had bought dollars in the range of $750 million to $800 million from the market, out of the $1.2 billion it had planned to purchase in the 10 months from March this year.
The central bank is compelled to buy dollars from the market to meet a reserves target set by the IMF under a $1.5 billion, three-year loan programme.
Seasonal demand for dollars is expected to pick up from August, dealers said.
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