COLOMBO, Feb 3 (Reuters) - The Sri Lankan rupee traded slightly firmer on Monday due to exporter dollar conversions, but dealers expect the local currency to depreciate on lower interest rate that could drive credit growth and imports.
The spot rupee, was trading at 130.68/78 per dollar at 0655 GMT, tad firmer from Friday’s close of 130.72/75.
“It is a very dull market and a few million dollars can make the change. It was light exporter conversions that made the change,” said a currency dealer who declined to be identified.
“But the market sees the currency to depreciate in the near future because of rising credit demand in a low interest rate regime. Fed decision and this weekend’s U.S. statement on bringing in another U.N. resolution against Sri Lanka will aggravate the depreciation,” the dealer said.
The Fed last week announced a further $10 billion reduction in its monthly bond buying as it stuck to a plan to wind down its extraordinary stimulus despite the recent turmoil across many emerging markets.
Dealers said the market was concerned about a possible gradual pull-out of foreign investors from government securities, resulting in depreciation of the currency.
Foreign holdings in government securities fell 0.2 percent to 481.89 billion rupees ($3.69 billion) in the week ended Jan. 29, the latest central bank data showed.
Dealers also said a renewed pressure by the U.S. to bring a resolution against Sri Lanka at U.N. Human Rights Council meeting in March also could hit investor confidence.
A State Department official during the weekend said the U.S. will table a U.N. human rights resolution against Sri Lanka putting new pressure on Colombo to address war crimes claims, but the government rejected U.S. criticism of its human rights record as “grossly disproportionate”.
Central Bank Governor Ajith Nivard Cabraal last week said Sri Lanka should not experience any major capital outflows or market volatility.
However, dealers said the Fed’s stimulus cut would have an impact on local interest rates in the event foreign investors withdraw their funds from t-bonds.
The rupee has gained about 3.4 percent since it hit a record low of 135.20 on Aug. 28. It lost 2.5 percent in 2013.
At 0656 GMT, Sri Lanka’s main stock index was down 0.28 percent, or 17.37 points, at 6,230.71. (Reporting by Ranga Sirilal and Shihar Aneez; Editing by Anand Basu)