ECONOMYNEXT – Excess liquidity in money markets spiked to 46 billion rupees over recent days official data showed, with the central bank mopping up minimal volumes with outright sales of Treasury bills over the past two week.
The central bank sold down about 10 billion rupees of Treasury bills in its portfolio bringing down its stock to 108.40 billion rupees on July 12, from 118.80 billion a day earlier, locking up foreign reserves.
When the central bank sells bills in its portfolio to a bank, the money disappears from the economy and cannot be loaned to third parties and the dollars purchased to generate the money in the first place is locked up in reserves.
In the week to July 17, the central bank only sold down a billion rupees of bills. In the week to July 26 also the bill holding came down by only a billion rupees to 106.17 billion rupees.
A soft-pegged central bank generally boosts imports and widens the current account deficit beyond financial and/or capital account inflows to generate pressure on the currency by purchasing bills with printed money to boost bank credit.
It will restrict domestic credit and imports and the narrow the external current account deficit by mopping up inflows.
However at the moment, bank credit is contracting. The central bank has kept money markets plus so that banks will find it easy to finance lending.
In general the central bank has been keeping excess liquidity around 20-30 billion rupees until this week.
However analysts say large volumes of excess liquidity can trigger speculative activity and mal-investments since productive projects take time to develop.
The central bank is also mopping up money temporarily for around a week through term repo deals in cautious policy.
Data showed that in the week to July 24, foreign investors were net sellers in bond markets with their holding coming down from 146 billion rupees to 142.3 billion. (Colombo/July29/2019)