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Foreign investors sell Rs17bn in Sri Lanka bonds in week

ECONOMYNEXT – Foreign investors have sold 17 billion rupees of bonds with total holdings of bonds dropping to 180.9 billion rupees from 197.9 billion rupees in the week to December 05, in perhaps the heaviest week of foreign selling in markets, central bank data shows.

Foreign investors held 324 billion rupees of bonds in April and had been steadily selling them down.

Since October 23, shortly before a political crisis emerged, foreigners have dumped 64 billion rupees of bonds.

Sri Lanka’s bond yields have eased after the statutory reserve ratio was cut in mid November, dumping tens of billions of rupees in to the banking system making it more profitable for foreigners to exit.

Sri Lanka has a soft-pegged exchange rate regime, where the central bank prints money after intervening in forex markets to maintain an exchange rate target.

However due to lender of last resort activities (printing money to stop reserve money from contracting or target the policy rate or both) it is not possible to maintain the exchange rate target either.

A soft-pegged central bank injects new rupees in the banking system through last resort windows or term reverse repo transactions or outright purchases of domestic securities like Treasury bills.

The new money allows banks to buy bonds including from fleeing foreign bond holders, without crowding out domestic credit.

Higher levels of currency defence have been seen in recent days, while overnight and longer term rates fell after the SRR cut. (Colombo/Dec10/2018)





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