Sri Lanka bond markets dry up; rupee reference rate unchanged

ECONOMYNEXT – Sri Lanka’s bond markets dried up Thursday ahead of a monetary policy announcement Monday and sharp rise in auction yields of Treasuries, and the rupee reference rate remained unchanged at 134.15 to the US dollar, dealers said.

In interbank markets overnight clean money was quoted at 6.25 percent and gilt-backed repurchase deals at 6.15.20 percent on opening.

Repos were later traded at 6.40 percent and quoted around 6.40/60 percent after the Central Bank said there will no reverse repo money auction on Thursday as liquidity improved with foreign outflows pausing.

On Wednesday excess liquidity was at 45 billion rupees with 2.7 billion rupees injected overnight and the Central Bank’s Treasury bill stock slightly down to 90.3 billion rupees from 91.5 billion rupees a day earlier.

Authorities announced a reference rate of 134.14 to the US dollar in forex markets, unchanged from a day earlier.

Bond markets dried up after as the market awaited a monetary policy announcement on Monday, and participants took stock of a 25 basis point rise in the 12-month yield at Wednesday’s Treasuries auction.

Some market participants are expecting a statutory reserve ratio (SRR) cut in line with what has happened in a time of previous balance of payments troubles.

A cut in the SRR releases liquidity into money markets, generates more foreign reserve losses when the money is spent and the exchange rate is defended.

By increasing the share of deposits that a bank can lend a reserve ratio cut improves the efficiency of the banking system. High SRR is an archaic monetary policy tool which increases banking sector intermediary costs but contributes little to inflation control after a credit system has got accustomed to operating at a particular rate.

There was no visible activity in bond markets dealers said though somewhat wide quotes were available for some maturities indicating uncertainty.

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A more liquid 01.09.2023, 8 -year bond was quoted around 9.85/95 percent and 01.08.2025 bond was quoted around 10.02/20 percent, dealers said.

A 30 billion rupee bond auction will also close Monday before the monetary policy announcement at 7.30 pm. (Colombo/Aug27/2015)

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