Sri Lankan Rupee Weakens as C.bank Raises Reference Rate After Fed Move

The Sri Lankan rupee edged lower on Thursday as the central bank raised the spot reference rate further, a day after the U.S. Federal Reserve hiked interest rates by 25 basis points, dealers said.

The Fed raised interest rates on Wednesday and signalled a faster pace of increases in 2017 as central bankers adapted to the incoming Donald Trump administration’s promises of tax cuts, spending and deregulation.

Asian shares and currencies struggled on Thursday after the rate hike for the first time in a year as it hinted at the risk of a faster pace of tightening than investors were positioned for.

Rupee forwards were active, with spot-next forwards traded at 149.20/40 per dollar, compared with Wednesday’s close of 148.95/149.05.

“The central bank increased the spot reference rate by 30 cents to 149.10, probably after the Fed rate hike,” currency dealer said, asking not to be named.

The move comes a day after the central bank raised the spot reference rate by 10 cents.

The spot rupee was hardly traded, but was quoted at 148.70/95.

The rupee usually rises in December ahead of Christmas and the New Year due to remittances from expatriates, but dealers said the currency was expected to face pressure due to higher dollar demand from importers following the Fed rate hike.

“The immediate reaction will be capital outflow,” said Danushka Samarasinghe, head of research at Softlogic Stockbrokers.

“The Fed rate hike will also raise the government’s foreign borrowing cost in the short term. This will compel the government to borrow more locally and the move could raise market interest rates. If that happens, there could be outward movement of money from equity market as well.”

Foreign investors have net sold 45.4 billion rupees ($305.6 million) worth of government securities in the seven weeks ended Dec. 7.

The rupee is expected to be under pressure on fears that U.S. President-elect Donald Trump’s economic policies will lead to a stronger greenback and trigger foreign fund outflows, some dealers said.

Sri Lankan shares were down 0.16 percent at 6,288.77 as of 0601 GMT. Turnover stood at 141.1 million SriLankan rupees ($952,734.6).

($1 = 148.1000 Sri Lankan rupees)

Courtesy : LBO