Foreign investors buy Sri Lanka rupee bonds for third week

ECONOMYNEXT – Foreign investors have bought Sri Lanka rupee bonds for the third week in a row, official data show, after some capital flight that came with a reversal of money policy from around August.

The stock of rupee bonds held by foreign investors grew to 114.3 billion rupees in the week to November 06, from 112.5 billion rupee a week earlier, central bank data show.

In the week to October 23, Treasuries held by foreigner climbed to 110.8 billion rupees from 108.9 billion a week earlier.

Sri Lanka central bank abandoned prudent monetary policy it had been conducting up to July, steadily mopping inflows permanently to keep a rupee peg strong and build up forex reserves.

However it allowed excess liquidity build up and then started to actively print money through open market operations to artificially push up down rates.

There have been calls to bring specific against specific actions of the central bank’s domestic operations that trigger monetary instability, currency collapses, which then trigger output shocks and political instability.

These include a so-called buffer strategy (under-rolling over maturing bonds and repaying them with bank overdrafts which are re-financed with central bank credit (printed money) and Zoros style swaps (a type of liquidity generating short term forward between the Treasury and Central Bank which puts pressure on the peg in the same way as printed money).

Skewed convertibility undertakings (delaying the sale of dollars to strengthen the peg until a ‘disorderly fall’ of the rupee – usually when credit or excess liquidity picks up, but buying dollars without a similar
‘disorderly appreciation’ especially when credit is weak.

Data showed that in September 2012, the central bank had bought two million dollars from banks without a ‘disorderly appreciation’ after monetary policy was reversed. (Colombo/Nov10/2019)

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