Foreign investors sell rupee bonds for two weeks in a row

ECONOMNEXT – Foreign investors have sold rupee denominated bonds for two weeks in a row after some buying in mid July official data showed.

Foreign holdings of rupee bonds fell to 137.1 billion rupees in the week to July 31, down from 142.3 billion rupees central bank data show.

In the week to July 24 foreigner sold, with their holding coming down to 142.3 billion rupees from 146.0 billion rupees.

In mid July, foreigners were net buyers in bond markets. In 2019 foreign holdings in rupee bonds have moved up and down.

Sri Lanka’s rupee has appreciated in 2019 as private credit contracted. Interest rates have also fallen despite some foreign selling by foreign investors and a widening budget deficit, amid weak revenues.

Dealers say falling rates, and the prospect of further rate cuts may have persuaded some foreign investors to sell.

Amid a rate cut by the Fed and continued to quantity tightening, there has also been some volatility in international markets, with the Yuan weakening and oil plunging. The US 10-year bond has also fallen.

After selling reserves in January 2019 to the finance ministry to part repay a maturing sovereign bond, Sri Lanka’s central bank has sold down its Treasury bill stock from a peak of 182 billion rupees to about 105 billion rupees by last Friday, mopping up about 400 million US dollars for its foreign reserves.

A pegged central bank that intervenes in forex markets to collect reserves, can keep the dollars it buys, by selling down its Treasury bill stock or issuing new sterilization securities (central bank paper).

If it buys Treasury bill or repurchases sterilization securities, there could a balance of payments deficit and the currency may fall, especially if credit demand is strong.

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In 2018 the central bank generated balance of payments pressure, by injecting cash through term reverse repo deals rather than outright purchases of Treasury bills.

Under a new monetary law, direct purchases of Treasury bills, which had generated a number of balance of payments crises, exchange controls, high inflation and price controls are expected to be ended.

But President Maithripala Sirisena in a shocking development has asked the central bank to continue to print money according to reports. (Colombo/Aug05/2019)

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