By Shihar Aneez
COLOMBO, Dec 23 (Reuters) - Sri Lanka's rupee fell to a 14-month low on Tuesday as the central bank allowed gradual depreciation of the rupee amid importer demand for dollars, while shares hit a new four-year low on negative investor sentiments.
The rupee LKR= fell 0.6 percent and closed at 112.70/80 per dollar, weaker than Monday's 112.00/10, its lowest close since Oct. 22, 2007.
"There was importer demand for dollars," said a currency dealer. "A state bank which usually represents central bank started buying dollars at 112.15 soon after the trade started and gradually increased the level to 112.50 per dollar."
The rupee has fallen around 2.4 percent since central bank allowed gradual depreciation on Dec. 8, and 4.2 percent since Oct. 30, when the central bank permitted limited depreciation of the rupee to help improve the competitiveness of the country's exports, abandoning its defence of the 108 level.
"There has been a tremendous pressure building up with exporters," Central Bank Governor Ajith Nivard Cabraal told Reuters. "That's why the currency has been allowed to move a little bit. So it is becoming competitive against the euro, sterling, and the Indian rupee also."
The rupee hit its life low of 113.45/65 per dollar on Sept. 19, 2007. Traders said that with the gradual rupee depreciation allowed by the central bank since Dec. 8, the currency was likely to slide further to around 113.50 by the end of the year.
Many analysts say the central bank allowed the rupee to depreciate to meet one of the conditions set by the International Monetary Fund for possible funding. But Cabraal said there was no such move from central bank.
The IMF warned Sri Lanka of a risk of a balance of payments crisis and recommended a more flexible exchange rate regime to avoid disruptive flows of short-term speculative capital.
The Colombo All-Share index .CSE fell 8.62 points to 1501.17, its lowest close since Dec. 29, 2004. The market has fallen around 41 percent so far this year due to poor earnings, high borrowing costs, and global woes.
A court ruling a halt to hedging payments for five banks, sovereign rating cuts, a government delay in implementing a court order on petrol price cut and a credit card scam reported on Monday also hurt the bourse, analysts said.
"We have not seen a change in investor sentiment," said Shivantha Meepage, a research analyst at HNB Stockbrokers. "Most investors are also away from the market due to this low sentiment amid holiday season."
Top conglomerate John Keells Holdings JKH.CM plummeted 7.41 percent to a near 5-1/2-year closing low of 50 rupees, calculated on a weighted average.
Market heavyweight and Sri Lanka's top fixed-phone operator Sri Lanka Telecom SLTL.CM shed 0.82 percent 30.25 rupees, while top private lender Commercial bank of Ceylon COMB.CM closed 1.08 percent weaker to 68.50 rupees a share.
The market turnover was 16 million rupees ($0.14 million), a fraction of last year's daily average of 400 million rupees, but more than a seven-year low of 13.1 million rupees hit on Dec. 4.
The interbank lending rate or call money rate CLIBOR edged up to 13.878 percent from Tuesday's 13.475 percent.
For secondary market rates, please see <0#LKBMK=>. ($1=112.75 Sri lankan rupees) (Editing by Andy Bruce)