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Sri Lanka bond yields up; overnight, term cash injected

ECONOMYNEXT – Sri Lanka’s bond yields rose higher Wednesday, and the central bank printed more money to ease an unusually large cash shortage that had developed within a period of currency pressure.

The central bank printed 17.87 billion rupees overnight at 7.99 percent, below the 8.5 percent ceiling policy rate after offering 20 billion. Another 10 billion rupees were printed for 6 days at 8.11 percent.

On Tuesday banks borrowed 15 billion rupees from the 8.5 percent window, as a large cash shortage developed coinciding with a 750 million dollar bond maturity at state-run National Savings Bank on September 18, which has swaps with the central bank.

An unwinding of a swap, with a central bank generates, which is in the style of an unsterilized peg defence, generates a cash shortage.

On Tuesday banks borrowed 15.7 billion rupee from the central bank’s overnight window, to cover a 26 billion rupee overnight cash shortage.

Despite currency pressure markets had been pumped full of money through term reverse repo deals by the central bank to maintain excess liquidity, which analysts say tends to put more pressure on the rupee.

If there are liquidity shortages any ‘float’ of the currency will take effect quickly. Under conditions of excess liquidity the currency could continue to weaken.

In early afternoon trade the rupee was quoted at 156.50/90 rupees to the US dollar.

t is not yet clear whether Wednesday’s injects will lead to excess liquidity.

Twice this year the central bank injected large volumes of rupees to the market first throug

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 A 3-year bond maturing on 15.10.2021 auction bond was quoted at 10.55/62 up from Tuesday’s closing of 10.35/45.

 The bond was auctioned on September 13 for an average yield 10.03 percent where dealers were forced to buy.

 A 7-year bond maturing on 15.10.2025 was quoted at 10.85/11.00 percent up from 10.65/80 a day earlier up from the auction 10.32 percent weighted average.

 A 5-year bond maturing on 15.07.2023 now quoted at 10.70/85 percent, up from 10.55/65 percent a day earlier.

h Treasury bill purchases and term reveres repo deal and in the current episode through currency swaps and failed to mop up the cash either through domestic operations or through unsterilized interventions, undermining the credibility of the soft peg and generating a run on the rupee. (Colombo/Sep19/2018)
 

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