June 1 (Reuters) – Sri Lankan rupee forwards fell on Wednesday due to dollar demand from importers amid fears the currency could weaken further if the government increased spending to deal with the country’s worst natural disaster since 2004, dealers said.
Dollar/rupee forwards, known as spot next, were at 148.30/40 per dollar compared with Tuesday’s close of 148.20/30.
Spot next, which acts as a proxy for spot currency, indicates the exchange rate for the day following conventional spot settlement, which is five days ahead for Wednesday’s trade.
“The demand (for dollar) is there. Still we can’t see the state names in the market,” a currency dealer said.
Two state banks, through which the central bank usually directs the market, at times sell dollars to curb rupee declines.
There was little impact on the rupee from Finance Minister Ravi Karunanayake’s announcement on Tuesday that Japan would lend $4.2 billion to Sri Lanka through both a loan and bond financing for budgetary support in the next two years.
The spot currency was not traded on Wednesday.
The spot rupee reference rate has been pegged at 145.75, dealers said. Sri Lanka‘s central bank had fixed the spot rate at 143.90 per dollar until May 2.
The cost of landslides and floods, caused by days of torrential rain, will be between $1.5 billion and $2 billion at the minimum, the government said last week, as the Indian Ocean island struggles to recover from a cyclonic storm.
Additional government borrowing for post-disaster spending could hurt the currency if there is lack of foreign and local aid, dealers said.
They said the rupee would continue to face pressure despite foreign inflows into government securities and expectations of further inflows, unless the inflows are large enough to boost reserves.
Foreign investors were net buyers of 7.23 billion rupees ($49.28 million) in the week ended May 25, central bank data showed.
The government is in the process of borrowing up to $3.5 billion from foreign sources via syndicated loans, sovereign bonds, and Islamic bonds, Finance Minister Ravi Karunanayake said last week.
Analysts said foreign inflows from such loans or bond issues would ease the pressure on the rupee.