March 20, 2012 / 12:26 PM / 6 years ago

UPDATE 1-Sri Lanka rupee recovers on state bank dlr sales

* Cbank mopping all dlrs to boost reserves-dealers

* More dlr liquidity within two days-cbank

* Stx down; Foreign outflow at 25 mln rupees (Adds rupee, stock close, details)

COLOMBO, March 20 (Reuters) - A state bank sold dollars to boost Sri Lanka’s rupee on Tuesday after it hit a record low of 131.60 a day earlier, despite strong importer demand for greenbacks due to the forthcoming April festive season.

The rupee, however, retreated to close at 129.90/130.00 a dollar, up from Monday’s close of 130.00/131.00.

“Two state banks sold dollars at 129.00 and the rupee recovered slightly,” a currency dealer said on condition of anonymity. Two others confirmed the move.

State-run Bank of Ceylon, through which the central bank usually directs the market, said the dollar sale was for its own purposes and was not an intervention by the central bank.

The other state-run bank, People’s Bank declined to comment.

Many dealers said the reason for the sharp rupee depreciation was due to the central bank buying dollars to boost reserves. The central bank spent more than $2.7 billion in the second half of 2011 to defend the rupee against depreciation.

“The central bank has to meet reserves target to borrow the next tranche of the International Monetary Fund loan. So it is buying all the dollars in the market,” a currency dealer said.

The IMF has said it is hoping to recommend the release of the next tranche of $800 million, which is expected to be decided at its executive board meeting in early April.

Central Bank Governor Ajith Nivard Cabraal on Friday said he will give a fair amount of dollars to the market from an expected inflow of $365 million due by the end of the month.

Central bank Chief Economist Swarna Gunaratne said the monetary authority did mop up more than $115 million in dollars from a share sale by the state-run pension fund, the Employees Provident Fund (EPF).

However, she said, the central bank will not absorb another $20 million expected later this week from another share sale.

The rupee has depreciated 12 percent since the central bank stopped intervening to defend a specific price on Feb. 9.

Analysts expect the rupee to recover in April on declining dollar demand and expected exporter conversions.

Citibank on Tuesday in a research note forecast a recovery to 120 a dollar by the end of the year.

“Major triggers would likely be IMF tranche disbursals as well as corporate bond issuances, both of which are expected to occur around April,” the research note.

The stock market meanwhile fell 35.44 points to 5,414.02 on retail selling with many investors steering clear given lingering uncertainty about high interest rates, the rupee and the potential for lower company earnings.

The day’s turnover was 627.4 million rupees ($4.8 million), well below last year’s daily average of 2.3 billion. Volume was 27.1 million. Last year’s daily average was a record 102.7 million.

The Colombo bourse is one of the worst performers this year among Asian markets, with a 10.87 percent loss. ($1 = 130.7500 Sri Lanka rupees) (Reporting by Shihar Aneez and Ranga Sirilal; Editing by Bryson Hull)

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