Foreign holdings of Sri Lanka rupee bonds slightly up

ECONOMYNEXT – Rupee-denominated bonds held by foreign investors rose slightly to 151.1 billion rupees by January 30, up from 150.1 billion rupees from a week earlier, official data showed.

In the previous week, foreign investors resumed bond purchases.

Rupee bond holders started to sell down their holdings and exporters held the dollar back when the credibility of a soft-peg was lost after the Central Bank stopped mopping up inflows in the first quarter of 2018 and printed tens of billions of rupees to impose a rate cut in April, as the economy started to recover.

In August, when the credibility of the peg was restored, unsterilised excess liquidity was allowed to be built up again, (from dollar purchases), leading to a second run on the rupee.

The rupee is now appreciating again, allowing the Central Bank to buy dollars if it wished.

There is also a large liquidity short, which is filled by term or overnight liquidity injections that can be reduced to mop up liquidity generated from dollar purchases, effectively locking up reserves.

The Central Bank said the liquidity short fell to 106.12 billion rupees by the end of last week, from 137.4 billion rupees a week earlier. In most years January sees liquiidty injections through central bank profit transfers and also provisional advances when the budget is brought in November. 

Separately, the Central Bank also holds a stock of 175 billion rupees of Treasury bills, mostly representing reserves ‘sold’ to the government to repay a sovereign bond, with no effect on reserve money or the currency peg.

The rupee comes under pressure, because the Central Bank prints money to target a interest rate, while also targeting the exchange rate under several convertibility undertakings that analysts have now identified.

The rupee had been allowed to appreciate up to 178 against the US dollar by end-January from 182 at end-December.





Over the last two years, the rupee had been pushed down to target a Real Effective Exchange Rate (REER) index, including in 2017, when the peg was on the strong side of the convertibility.

In 2017, over a billion US dollars were bought with the REER index as the main convertibility undertaking and the rupee mopped up.

Mopping up liquidity tends to strengthen the peg.

Meanwhile, reserve money eased slightly to 954.3 billion rupees, from 956.1 billion rupees. Reserve money can fall as the rupee strengthens, but also due to weakening economic activity. (Colombo/Feb05/2019 – SB)

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