The Sri Lankan rupee rose slightly on Monday due to a lack of importer dollar demand after the central bank kept its key policy rate steady, as expected.

The spot rupee was trading at 130.78/82 per dollar at 0710 GMT, firmer from Thursday’s close of 130.83/87. Both the currency and stock markets were closed for a Buddhist religious holiday on Friday.

Before the market opened, Sri Lanka’s central bank kept policy rates steady at multi-year lows, with inflation expected to be contained throughout 2014 by “well-managed demand conditions and improved domestic supply”.

The central bank said a net $119 million came into the stock and bond markets this year through Feb. 10. The central bank absorbed $58.7 million to prevent rupee volatility.

However, a former central banker and an economics professor warned over the weekend that the stable exchange rate, which is defended via selling and buying dollars in a lower interest rate regime, is not sustainable.

“The rupee already shows signs of depreciation in the face of high import demand buttressed by low interest rates,” Sirimevan Colombage, a senior professor at the Open University of Sri Lanka, wrote in a local newspaper.

“These mounting demand pressures will necessitate a depreciation of the exchange rate to arrest the surge in imports. Hence, maintaining a stable exchange rate in a low interest rate regime is a remote possibility.”

He said either a significant depreciation of the currency or an upward movement of interest rates or both is inevitable in the absence of tangible growth in the export sector.

Central Bank Governor Ajith Nivard Cabraal said, “the current conditions are sustainable,” in a Twitter session responding to a Reuters question on how long the bank can maintain lower interest rates and steady exchange rate. He did not elaborate.

Currency dealers and traders said the central bank’s current policies should work until the market sees a jump in private sector credit growth, which bottomed out with a gain of 7.5 percent year-on-year in December and 7.3 percent a month earlier.

Dealers expect the central bank to keep the currency below 130.85 per dollar until April. Usually, the rupee is under pressure in March and early April due to seasonal imports ahead of the traditional new year in mid-April.

The rupee has gained about 3.3 percent since it hit a record low of 135.20 on Aug. 28 last year. It lost 2.5 percent in 2013.

Sri Lanka’s main stock index was down 0.29 percent, or 17.66 points, at 6,065.73. - Reuters