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Foreign investors sell some rupee bonds after rate cut

ECONOMYNEXT – Sri Lanka foreign investors have sold about 3.47 billion rupees of (about 20 million US dollars) in the week to June 04, official data showed, following a 50 basis point rate cut on May 31.

Foreign investor holdings of rupee bonds fell to 142.6 billion rupees by June 04, from 146.1 billion rupees a week earlier.

Foreign investors bought into rupee bonds in earlier weeks, though there were some selling shortly after suicide bombs went off in April.

Rupee bond yeilds picked up after the rate cut, as they took profits. Foreign investor sales may also have contributed, dealers said.

Sri Lanka’s private credit weakened in the first quarter of 2019, after the collapse of the currency peg in 2019, giving space for the banking system to absorb foreign selling.

Sri Lanka’s central bank cut its floor policy rate from 8.00 to 7.50 percent on May 31, after keeping rates artificially high around 8.50 percent by overnight and short term liquidity withdrawing (repo) auctions.

Analysts welcomed the cautious stance given the uncertainty after suicide bombs though weak private credit indicates pressure on the rupee is off.

The central bank has also started selling down its Treasury bill stock to permanently mop up liquidity and build forex reserves.

The central bank’s Treasury bill stock (acquired over 2018 to print money and sell forex reserves to settle bonds) fell to 130 billion rupees by end by June 07, from 138 billion rupees.

Excess liquidity in money market (including cash held temporarily in term repo deals) fell to 44.9 billion rupees by end of last week from 71.22 billion rupees a week earlier, the central bank said.

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Liquidity from dollar purchases that are temporally mopped up by short term repo operations can leave quickly when the rupees are loaned out as credit.

Liquidity (aggregate balance of the commericial banking system) falls when the central bank sell Treasury bills in its portfolio, or sells dollars to defend a peg, which can tend to push up overnight rates. (Colombo/June10/2019 – corrected last week bond holdings Rs146bn)
 

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