Dealers expect more downward pressure on the local currency after the US Federal Reserve further trimmed its monetary stimulus.
The spot rupee, which hit 130.75/80 per dollar early in the day on importer dollar demand, closed at 130.72/75 on late exporter conversions of the US currency and inflows from inward remittances, but still weaker from Thursday's close of 130.63/65.
The Fed announced a further $10 billion reduction in its monthly bond buying as it stuck to a plan to wind down its extraordinary stimulus despite the recent turmoil across many emerging markets.
Dealers said the market is concerned about a possible gradual pull-out of foreign investors from government securities, resulting in depreciation of the currency.
Some dealers said there would not be any significant withdrawal of foreign funds from t-bills and t-bonds. Foreign investors hold 482.84 billion rupees ($3.69 billion) in Sri Lankan government securities, mostly in illiquid long-term t-bonds.
Central Bank Governor Ajith Nivard Cabraal said on Monday in the event of the Federal Reserve trimming its stimulus, Sri Lanka should not experience any major capital outflows or market volatility.
However, dealers said the Fed's stimulus cut would have an impact on local interest rates in the event foreign investors withdraw their funds from t-bonds.
The rupee fell 0.2 percent in the first two sessions of this week because of bond outflows on fears over the Fed further trimming its monetary stimulus and demand for the greenback from importers despite dollar sales by a state bank to prevent the fall. Dealers expect the rupee to fall in the absence of any intervention by the central bank due to importer dollar demand but see the currency trading between 130.50 and 131.50 in the near future.
The rupee has gained about 3.4 percent since it hit a record low of 135.20 on Aug. 28. It lost 2.5 percent in 2013.