Sri Lanka rupee strengthens, stocks close higher

Dec 20, 2012 (LBO) – Sri Lanka’s stocks closed 0.2 percent higher Thursday amid foreign investor interest and the rupee strengthened sharply against US dollar, brokers and dealers said.

Sri Lanka’s central bank usually weakens the rupee by purchasing dollar inflows to the state. Analysts have said that with policy rates over 9.0 percent, Sri Lanka can easily maintain its peg and strengthen the currency if inflows to the state are turned loose into forex markets.

In equity markets foreign investors were net buyers, selling 163 million rupees worth stock and buying 695 million rupees of shares in a day that 105 stocks advanced and 61 fell back.

Ceylon Tobacco closed at 800 rupees up 4,70, JKH closed at 218 up 1.0 rupee, Bukit Darah closed at 670.0 rupees up 8.00 helping the index most.

Nestle fell 12 rupees to 1,500, Property Development fell 7.90 rupees to 43.10 and Sri Lanka Telecom fell 20 cents to close at 43.50. Distilleries Corporation closed flat at 159.0 and Aitken Spence closed at 117.60, up 10 cents.

Updated The benchmark Colombo All Share Index closed at 5,527.36 up 14.7 points and the S&P SL20 Index closed at 3,030.86, up 12.87 points or 0.43 percent.

In forex market the rupee made gains against the US dollar rising as much 127.40/70 to the US dollar in the spot market after opening around 120.30/40 rupees.

Dealers said there was selling in the near term forward market.

Sri Lanka usually sees some currency appreciation in December with exporters converting dollars to pay bonuses.

The state also usually prints money to give salary advances but a festival related cash drawdown triggers an expansion in the monetary base from a real demand for notes-in-circulation.

Last week there was a 15 billion rupee liquidity shortage in the banking system (which usually happens due a large external payment through a commercial bank that is met by the Central Bank) which was sterilized with money injection.

Overnight cash injections which keep banks short of money and scrambling to raise deposits and curtail credit to cover their short positions does not weaken the rupee peg, unlike when the Central Bank purchases Treasury bills outright.

The liquidity shortage has since turned into a surplus, indicating that the Central Bank has been buying dollar inflows.

It has also reduced its overall bill holdings above term auctions.