Foreign investors sell Sri Lanka rupee bonds
ECONOMYNEXT – Foreign investors have sold rupee bonds in the week to January 29, 2020, ending a several weeks of net purchases, official data show.
Foreign investors have sold 6.5 billion rupees of rupee bonds, taking their holdings down to 107.9 billion rupees from 114.4 billion rupees a week earlier.
Foreigners have generally been net buyers in bond markets in 2020 with their holdings rising from 104.2 billion rupees on January 01.
Sri Lanka cut policy rates on January 30. However dealers say they did not see heavy pressure on longer term bonds indicating that the sales were on short term securities.
Bond yields fell about 25 to 30 basis points after the rate cut.
Foreigners buy and sell bonds in some weeks, though there has been intensified selling after rates cuts made during an economic and credit recovery in the past, which eventually leads to a currency crisis.
Such a cut, labeled the ‘unkindest cut’ by analysts, last occurred in April 2018, when the credit system and the economy were strongly recovering from a 2015/2016 currency crisis.
A similar rate was made in April 2015. However liquidity was being injected even before the rate cut by terminating term repo deals, to enforce the earlier rate.
At the time Sri Lanka’s credit system was recovering from a 2012 currency crisis.
It is not yet clear whether the 2020 rate cut would have similar effects, since private credit is still weak.
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As of November 2019, Sri Lanka’s central bank was buying dollars to prevent the appreciation of the rupee amid weak domestic credit (a strong side convertibility undertaking).
But in December there were some net sales. Private and state credit has also picked up in December.
Meanwhile Sri Lanka has slashed value added tax from 15 to 8 percent, which may increase pressure on domestic borrowings, while a drought has pushed up credit pressure on state enterprises. (Colombo/Feb03/2020 – Update II – headline corrected)