Dec 23, 2016 (Reuters) – The Sri Lankan rupee closed higher on Friday as dollar selling by a state-run bank helped the local currency gain in lacklustre trading ahead of a long weekend, amid little demand from importers for the U.S. currency, dealers said.
Rupee forwards were active, with one-week forwards closing at 149.75/90 per dollar, up from Thursday’s close of 150.70/90.
The spot rupee and spot-next were hardly traded. The central bank increased the spot reference by a total 40 cents last week.
“There was some intervention with a state bank’s dollar sales, which we did not see until yesterday,” said a currency dealer asking not to be named.
The central bank said after market hours on Friday that “allowing the exchange rate to depreciate is not necessarily a bad approach in economic management.”
In an explanatory note titled ‘Exchange rate and economic impact of depreciation’, it said “though the net effect is difficult to be evaluated accurately, it is important to understand that depreciation of the rupee has not only negative implications, but also positive implications on the Sri Lankan economy.”
“The most prudent policy stance would be to allow the exchange rate to be determined flexibly, according to supply and demand conditions for foreign exchange in the market,” it said.
The central bank also said any decision to move away from its current intervention policy would lead to a sharp depreciation immediately before stabilising thereafter.
“Allowing the exchange rate to be determined according to market forces would not necessarily lead to a continuous depreciation of the rupee,” it said.
Some dealers said they expected the central bank to permit market forces to determine the rupee’s direction next year.
Officials from the central bank were not available for comment.
Finance Minister Ravi Karunanayake told Reuters in an interview on Tuesday that the currency would recover and be steady next year with expected foreign inflows.
The rupee usually rises in December ahead of Christmas and New Year due to remittances from expatriates, but dealers said the currency was expected to face pressure this time due to higher dollar demand from importers following a 25-basis-point rate increase by the U.S. Federal Reserve last week.
Analysts said they expected some capital outflows as an immediate reaction to the Fed rate hike.
Foreign investors net sold 55.2 billion rupees ($369.23 million) of government securities in the nine weeks ended Dec. 21. ($1 = 149.5000 Sri Lankan rupees)