Sri Lankan rupee falls as foreign investors prefer new eurobonds

July 12, 2016 (Reuters) – The Sri Lankan rupee fell on Tuesday on a lack of exporter dollar conversions and as foreign investors cut down on rupee bond buying in favour of a new higher-yielding sovereign debt, dealers said. Sri Lanka raised $1.5 billion in its first sale of dual-tranche eurobonds on Monday, although at a lower borrowing cost than initially expected, as yield-hungry global investors put in $6.6 billion in offers. The Sri Lankan rupee one-week forwards, which have been acting as a proxy for the spot rupee, were at 146.
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45/50 per dollar at 0551 GMT, weaker than Monday's close of 146.20/50. The spot rupee is tightly managed by the central bank and market participants use the forward market levels for guidance on the currency. "After the sovereign bond sale, we do not see much foreign buying in local bonds and that is the reason why we do not see dollar liquidity in the market," said a currency dealer, asking not to be named. "Exporters have been holding in dollars because they still believe that the currency may fall further given that the macroeconomic fundamentals still point towards further downward pressure on the currency." Other dealers said the market was waiting to see if there could be any change in the currency level after the dollar bond inflows. Dealers said the central bank did not intervene in the foreign exchange market for the sixth straight session on Tuesday. Last week, central bank governor Indrajith Coomaraswamy said the bank would manage the exchange rate flexibly avoiding too much volatility. The spot rupee was not quoted, but the spot-next, which are rupee forwards settled three days after the spot rupee settlement, were trading at 146.30/45 per dollar, weaker than Monday's close of 146.10/30, dealers said. The Sri Lankan stock index was up 0.57 percent at 6,408.49 as of 0556 GMT, on a turnover of 201.7 million rupees ($1.38 million). "Market is up on low volumes with improved confidence factor with the sovereign bond, and investors expect the local interest rates to come down after the sovereign bond (issuance)," said Dimantha Mathew, head of research, First Capital Equities (Pvt) Ltd.