Foreign investors sell Sri Lanka rupee bonds for second week
ECONOMYNEXT – Foreign investors in Sri Lanka rupee-denominated bonds were net sellers for the second week running in April as the rupee strengthened and interest rates fell, official data showed.
The central bank said foreign holdings of rupee bonds fell to 164.1 billion rupees in the week to April 10, from 166.0 billion a week earlier.
In the week to April 03, foreign investor holdings fell to 166.0 billion from 167.9 billion in March.
Foreign investor holdings climbed from 157 billion rupees in December 2018 as investor confidence strengthened in Sri Lanka after the successful repayment of a maturing dollar bond with forex reserves and the courts restored a legal administration.
Sri Lanka’s private credit turned negative in January and it was weak in February generating a surplus in forex markets as banks loaned less than the deposits they received.
Sri Lanka’s rupee has appreciated from 182 rupees against the US dollar to 174 amid weak credit and interest rates have also fallen, allowing foreign investors who bought bonds to take profits.
Still, nervous investors may also use the opportunity to exit. But analysts say the strengthening of the rupee will help restore long term credibility, though it may generate short term profit taking.
Sri Lanka’s rupee has weakened in May in past years, due to cash injections made in April to accommodate festival related real money demand which returns to the system later.
However, in 2019, the central bank has so far kept overnight markets short.
"The central bank should be prepared to let the rupee weaken in case capital flight intensifies," says EN’s economics columnist Bellwether.
"Short term rates can also be allowed to move up to the policy rate ceiling of 9.0 percent by domestic operations rather than dollar selling."
Private credit was weak in both January and February, indicating that there is ample slack in credit to absorb any exiting bonds if credit is still weak in March and April.
If credit has strengthened, the rupee may come under pressure. Sri Lanka is also due to hike state sector salaries later in the year, which may put pressure on domestic credit.
Sri Lanka has a convertibility undertaking called ‘preventing a disorderly adjustment’ relating to a soft-pegging psychological condition that classical economists call ‘fear of floating.’
Even the International Monetary Fund however has asked the exchange rate to be the first line of defence against capital flight. (COLOMBO, 16 April 2019-SB)