ECONOMYNEXT – Foreign investors have sold about 10.8 billion rupees in the week to Wednesday May 08, taking their total holding down to 143.7 billion rupees, official data showed.
There strong heavy foreign selling in bonds towards the end of the previous week, but not so much up to Wednesday this week, dealers said.
Sri Lanka’s private credit fell sharply in the first quarter, after the monetary instability generated by the central bank in March/April and July/September from two liquidity spikes just as the economy recovered.
The recovery has been since killed due to a currency collapse and prolonged liquidity shortages, which are now ending.
Weak credit has reduced imports and pressure on the currency.
In May liquidity spiked partly from dollar conversions by the government, but there have also been forex purchases by the central bank in the open market as private credit fell.
Analysts who have studied Sri Lanka’s unstable soft-peg say as soon as there are capital outflows, excess liquidity has to be mopped up and the rupee allowed to float, so that the currency does not collapse.
The room for a currency collapse however is limited if the steep fall in private credit persists. The banking system could easily absorb bond sales if private credit is weak.
Sri Lanka’s rupee tends to weaken party because government dollar inflows are sold to the central bank for new money (expanding reverse money through a convertibility undertaking to maintain a dollar peg), instead of being traded for old money like in a floating rate.
Neither floating currencies nor hard pegged currencies (there is no fixed policy rate and short term rates float) depreciate permanently because monetary ad exchange rate policies are not in conflict.
Sri Lanka’s central bank has mopped up part of the excess liquidity over the last three days with repo auction, stopping overnight rates from falling before 8.40 percent. (Colombo/May10/2019)