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Foreign investors sell more Sri Lanka rupee bonds after rate cut

ECONOMYNEXT – Foreign investors have sold another eight billion rupees worth Sri Lanka rupee bonds in the week to March 04, 2020, official data shows, taking the total sold since a rate cut on January 30 to 24.9 billion rupees (about 137 million US dollars).

Foreign investors also sold about 7 billion rupees in the week before the rate cut, where they held 114 billion rupees of bonds.

Dwindling Credibility

The latest sales bring down foreign held rupee bonds to about 83 billion rupees, or about 450 million US dollars.

Foreign investors held about 450 billion rupees in bonds at the beginning of 2015, having entered the country at a time when Sri Lanka’s soft-peg with the US dollar had more credibility.

However the rupee had rapidly collapsed from 2018, with two currency crises coming in rapid succession.

When a country does not have a working monetary policy framework (a consistent peg or a genuine floating rate) frequent currency collapses and exchange controls discourage capital inflows and economic growth is disrupted.

Monetary instability also triggers trade controls, which tend to hit growth.

When the credibility of the peg deteriorates and the currency depreciates, nominal interest rates tend to go up, analysts say.

Foreigners exited as rates were cut in early 2015, as credit picked up as the economy recovered strongly from a 2012/2012 currency crisis. At the time the existing rate ceiling was enforced with liquidity injections from a terminating term reverse repo deals.

In 2018 April, when the credit system was recovering from a 2015/2016 currency crisis, rates were against cut while liquidity injections were being made to enforce the existing ceiling rate of the policy corridor.

In January 2020, however the central bank was not printing money to enforce the earlier ceiling policy rate, but Sri Lanka’s rating is lower, and the outlook has also been cut after value added taxes were cut.

Foreign investors are also exiting Sri Lanka’s stock market with long-term investors cutting their positions in blue chip companies. (Colombo/Mar09/2020)