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Foreign investors sell some bonds ahead of rate decision

ECONOMYNEXT – Foreign investors have sold about 3 billion rupees of rupee denominated bonds in the week to July 03, central bank data showed, as a monetary policy decision is awaited on July 11.

Foreign holdings of rupee bonds fell to 142.1 billion rupees by July 03, from 146.1 billion rupees a week earlier.

Foreign investors sold rupee bond heavily in the last quarter of 2018 as the central bank generated a liquidity shock to de-stabilize a peg with the US dollar and a political crisis in October undermined investor confidence.

Foreign investor holdings fell to 145 billion rupees by mid-January 2019 and climbed up to 167 billion rupees by March 27, according the central bank data.

Selling resumed in April and by May 08, foreign investor holdings were down to 143 billion rupees. There have been purchases and sales in alternate weeks since then.

A cut in the floor policy rate in May 30 has also not generated any large scale selling.

With weak private credit in 2019, there has been excess liquidity in money markets from dollar purchases by the central bank (a balance of payments surplus) to maintain a pegged exchange rate. The central bank has also permanently mopped up liquidity to build reserves.

The central bank did not print money to enforce the rate cut, but lowered the policy floor and term repo auctions through which rates were kept artificially above market, due to weak private credit.

With rates falling, market participants say the interest rate differential between Sri Lanka US dollar and rupee bonds have declined, making rupee bonds less attractive.

Combined with a real effective exchange rate targeting, which may point to depreciation investors may not see much upside in rupee bonds, they say.

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Sri Lanka has high nominal interests rates mainly due to monetary instability, involving contradictory money and exchange policies, analysts have said.

With weak private credit, analysts have said the rupee is not under pressure, but there has been revenue falls and new expenditure has also kicked in from July, putting pressure on the budget.

Losses are also stated to show up state energy utilities which will also pressure the overall public sector deficit. (Colombo/July08,2019)

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