ECONOMYNEXT - Sri Lanka's rupee fell to a new low of 167 to the US dollar dealers said, as the central bank continued to inject cash to money markets around 50 basis points below the ceiling policy rate.
The spot US dollar closed at 167.10/30 levels to the green back Wednesday down from 165.90/166.10 levels a day earlier.
The spot dollar traded as high as 167.20 levels to the US dollar during the day, market participants said.
Sri Lanka's money markets are short of cash and the central bank continued to inject cash below the ceiling policy rate of 8.50 percent.
The liquidity shortage filled overnight through a reverse repo auction was 17.87 billion rupees at a weighted average yield of 7.99 percent, below the ceiling policy rate of 8.5 percent which could be used to protect the rupee without a formal rate hike.
Only 3.5 billion rupees was borrowed at 8.5 percent.
But the central bank imposed a 100 percent margin on import letters of credit for cars. Commercial vehicles are exempt. After triggering currency pressure, the central bank has resorted to trade controls in the past.
On September 18, a 750 million dollar bond with the National Savings Bank matured. The NSB had swaps with the central bank.
On Wednesday the central bank rejected a bill auction for 17.5 billion rupees, raising the possibility that money would be printed to permanently end part of the cash short that cropped up this week.
While the central bank may have little choice but to inject some liquidity permanently to the banking system, analysts say it is important to keep the money markets short overnight by over 25 billion rupees at least, to help avert a further weakness in the rupee.
Since the currency pressure began, the central bank kept money market short overnight only on four days, and new money had been injected about 50 basis points or more below the ceiling 8.5 percent policy rate.
If the rupee is allowed to float, analysts say it is essential that money markets are kept short until the currency stabilizes.
The central bank had earlier cut overnight dollar net open positions, which analysts had warned would create more volatility in the rupee dollar exchange rate. (Colombo/Sept19/2018)