COLOMBO: The Sri Lankan rupee traded a tad firmer on Monday as banks sold dollars to cover short positions, but the market expects downward pressure on the currency due to rising imports in a steady exchange rate regime.
President Mahinda Rajapaksa, also the finance minister, who is set to seek an unprecedented third six-year term, unveiled a 2015 budget on Friday that trims VAT and cuts deficit while providing a range of handouts, mainly for rural communities.
The spot currency was traded at 130.75/80 per dollar at 0711 GMT, slightly firmer from Friday's close of 130.85/95, dealers said. It was largely not traded last week on the central bank's moral suasion after closing at 130.60/80 on Oct. 17.
"The rupee is firmer on bank selling," a currency dealer said. Dealers said the rupee will be under downward pressure because lower rates and a stable exchange rate maintained by the central bank will encourage more imports in the medium term.
"But if investments in industries take place with the tax incentives given in the budget, it will help the currency to be stable or even to appreciate in the long term," a trader said.
Dealers said no moral suasion from the central bank was seen on Monday, but throughout last week it had persuaded some banks not to trade spot and the spot-next below certain levels to prevent sharp volatility.
Nandalal Weerasinghe, a central bank deputy governor, said on Oct. 20 that the monetary authority would intervene to prevent short-term volatility in the rupee.
Weerasinghe said the central bank has been preventing a sharp appreciation in the currency by intervening to maintain some stability over the last 12 months.
Overseas investors have sold a net 30.9 billion Sri Lankan rupees ($236.24 million) worth of government securities in the five weeks through Oct. 22, data from the central bank showed.
Sri Lanka's stock market index was down 0.06 percent, or 4.47 points, at 7,209.01 as of 0720 GMT. Turnover was 773.5 million Sri Lankan rupees ($5.91 million), with 25.8 million shares changing hands.
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