COLOMBO, May 20 (Reuters) - The Sri Lankan rupee traded steady on Tuesday after the central bank held its key policy rates at multi-year lows as expected, but dealers said upward pressure on the local currency was offset through dollar buying by state banks.
Dealers expect the Sri Lankan currency to rise, if the central bank allowed, fed by steady inflows in the absence of strong demand for imports and credit.
The rupee was trading at 130.34/40 per dollar at 0607 GMT, little changed from Monday's close of 130.35/40.
"Rupee is appreciating. There are (dollar) conversions. But as long as the state banks on behalf of central bank are buying, you won't see it on the exchange rate," a currency dealer said.
Dealers said the central bank had been preventing the appreciation over the last few weeks as steady inflows pressured the currency upward amid dampened demand for private sector credit and imports.
While maintaining the policy rate for the fourth straight month on Tuesday, Sri Lanka's central bank said it expected to introduce a new guarantee scheme for gold loans to boost credit growth that hit a four-year low in March.
Despite a multi-year low interest rate regime, data showed private sector credit grew at a four-year low of 4.3 percent in March from a year earlier, while imports in February fell 6.2 percent on the year.
On Monday, central bank governor Cabraal said private sector credit growth would pick up to around 15 percent by end-2014 and continue to improve through 2016.
Dealers said lack of credit growth and a contraction in imports could hit the economy unless the government propped up expansion through infrastructure funding.
Steady inflows from remittances and exporter conversions, amid lack of importer dollar demand earlier led to the rupee's appreciation, dealers said. They expect the rupee to face upward pressure until credit growth and imports reverse their trends.
The currency has hovered between 130.55 and 130.70 from March 3 through May 8, Thomson Reuters data showed, with the central bank intervening to smoothen any sharp volatility.
Sri Lanka's main stock index was down 0.03 percent, or 1.75 points, at 6,317.49 points by 0614 GMT. Turnover was at 201.5 million rupees ($1.55 million), with 9.17 million shares changing hands.
Stockbrokers said many investors had been compelled to return to the market due to the low interest rates that have made fixed-income assets less attractive.
$1 = 130.3500 Sri Lanka rupees Reporting by Shihar Aneez and Ranga Sirilal; Editing by Sunil Nair