Foreigners buy into Sri Lanka rupee bonds, cheaper money injected

ECONOMYNEXT – Foreign investors have bought 3.2 billion rupees worth domestic currency denominated bonds in the week to February 2019, boosting their total holdings to 165.9 billion rupees, official data showed.

In money markets, policy appeared to have loosened slightly with money injected below 9.0 percent from February 08.

In the week to February 06, foreign investor bought 11 billion rupees, taking their holding up to 162.6 billion rupees, from 151.1 billion rupees, Central Bank data showed.

The Central Bank had bought 36 million dollars from forex markets in January 2019, and sold 33.5 million dollars maintaining a peg, data showed, down from sales of 122.0 million dollars in December when the currency was under pressure.

However, in December 2018, amid currency pressure, the Central Bank had also bought 2.71 million dollars from the market.

On February 15, the overnight liquidity short was 82.5 billion rupees, which was filled by the overnight window at 9.0 percent and at auction at rates between 8.95 to 9.00 percent.

Looser Policy

Monetary policy had loosened slightly from February 05, where the Central Bank did not print money below 9.0 percent, its ceiling policy rate and the exchange rate strengthened amid foreign dollar purchases.

On February 05, overnight rates spiked to 9.17 percent and policy was loosened from the next day, data shows.

On February 08, money was pumped at rates as low as 8.85 percent. Seven-day money was also injected at rates as low as 8.85 percent on February 15, indicating an effective ‘rate cut’.

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A pegged exchange rate will weaken when liquidity injections are made (expanding reserve money beyond what is determined by the balance of payments) and strengthen when liquidity is mopped up.

In floating exchange rate, open market operations are simply directed at interest rates, no liquidity changes result from foreign exchange operations.

The Central Bank said the banking system liquidity short expanded to 113.17 billion rupees in the week to February 15, up from 106.15 billion a week earlier, which was filled by injections.

Meanwhile, reserve money expanded slightly to 955 million US dollars from 954.2 million US dollars a week earlier. Interbank liquidity can also change due to drawn downs of cash from banks by customers.

(Colombo/Feb18/2019-SB)

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