Sri Lanka rupee gains against greenback, forward premiums fall

Jan 23, 2008 (LBO) — The Sri Lanka rupee traded under 108.00 to the US dollar and overnight money fell from peaks above 20 percent in early trading Wednesday as the dollar weakened in international markets following a surprise rate cut, dealers said. The rupee traded around 107.88/108.92 in late trading as a state name that usually represents the central bank buying dollars prevented the rupee from appreciating above 107.80 to the dollar.

Sri Lanka’s financial markets have been largely unaffected by global turmoil and stocks zoomed 2.7 percent Wednesday.

“We took action to tighten provisioning of banks very early,” Central Bank Governor Nivard Cabraal told LBO.

“At the time banks screamed. But now people have realized its value.”

Sri Lanka’s monetary policy has been tight since November and foreign investors have been buying into high yield government bonds, and the rupee has been steadily appreciating.

“The market is flooded with dollars,” a dealer told LBO. “It is not prudent to run a long dollar position, with rupee rates at 19.00 percent.”

Banks are also selling dollars and converting to rupees and exporters are also selling forward.

Forward premiums have now fallen below interest rate differentials at 110.80 rupees for 3-months which indicates a rupee rate of around 14.25 percent which is lower the actual 3-month interbank rate of 18.50/20.00 percent and T-bill rates of 19.45 percent.

Despite dollar interest rates falling, the forward premium was also unchanged from yesterday.

In the past forward premiums based on interest differentials have usually been higher than the eventual actual rate at the expiry of the contract.

Early in the day money rose to 22 percent for small names before falling to around 16.50 percent, dealers said.

At Wednesday’s Treasury bill auction yields remained flat with 3-month yields at 19.25 percent, 6-months at 19.29 percent and 12-months at 19.45 percent as the government retired seven billions rupees worth bonds and accepted only two billion from the market.

Meanwhile, equity markets closed higher with some excitement over a bombing raid in the Tamil Tiger stronghold of Kilinochchi targeting the hideout of guerilla leader Vellupillai Prabhakaran.

The benchmark Colombo all share index zoomed 2.7 percent and the Milanka index of liquid stocks also closed 2.6 percent higher.

Updated