Foreign investors sell Sri Lanka rupee bonds

ECONOMYEXT – Foreign investors have sold some rupee bonds for the third week in a row, taking the total down to 103.8 billion rupees in the week to February 12, 2020, official data show.

Foreign investors were net buyers of rupee bond in the week to January 22, 2020 when the total rupee bonds held by foreigners went up to 114.4 billion rupees from 109.5 billion rupees a week earlier, central bank data showed.

Foreign investors sometimes sell bond steadily for several week and then others start buying.

However foreign investors in rupee bonds have generally exited after monetary instability worsened from 2015, amid real effective exchange rate and call money rate targeting.

Sri Lanka cut policy rates 50 basis points on January 30 amid signs that private credit is picking up and the budget deficit is to widen.

Though there was spike in private credit in December, it is not clear whether there was a pick up in January, since there are usually attempts to push credit volumes in the month, industry analysts say.

As long as total domestic credit is weak, sales of rupee bonds by foreigners can be easily absorbed by the banking system and other bond buyers, analysts say.

Monetary instability begins when liquidity is steadily injected to target call money rates, while also targeting the exchange rate.

In 2018, analysts traced a rate cut in April 2018 liquidity injections around July/August to the currency collapse and output shock that followed.

By the time the 2018 rate cut was announced the central bank was already printing money to enforce the existing – higher – policy rate. (Colombo/Feb16/2020)

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