Sri Lankan rupee gains to over 6-month high after state bank reduces bid

COLOMBO Thu May 8, 2014 8:04am EDT

COLOMBO May 8 (Reuters) - The Sri Lankan rupee ended firmer on Thursday at its highest level in more than six months after a state bank reduced its dollar buying bid as the local currency faced upward pressure in the absence of credit demand and imports.

The rupee closed at 130.50/52 per dollar, its highest close since Oct. 24 and firmer from Wednesday's close of 130.60/61.

Dealers said one of the two state banks, through which the central bank usually intervenes in the market, stopped buying the U.S. currency at 130.60 and allowed the market forces to determine the rupee.

"But later the same bank started to buy dollars at 130.50, directing the market. The rupee is following most of the other currencies, which appreciated against the U.S. dollar today," said a currency dealer asking not to be named.

Many dealers said the rupee will be under upward pressure until lower credit growth and imports reverse their trend.

Despite a multi-year low interest rate regime, latest data showed private sector credit grew 4.4 percent in February from a year earlier, the slowest expansion since May 2010, while imports in February fell 6.2 percent on year.

Dealers said lack of credit expansion and a contraction in imports could hit economic growth unless the government props up expansion through infrastructure funding.

The central bank, in its monetary policy statement last month, however, expressed confidence that private sector credit growth would rebound in the second quarter and push up the pace of economic expansion.

The currency has been hovering between 130.55 and 130.70 since March 3, Thomson Reuters data showed, with the central bank intervening to smoothen any sharp volatility. (Reporting by Shihar Aneez; Editing by Anand Basu)