ECONOMYNEXT – Sri Lanka’ central bank has started outright sales of its permanent Treasury bill stock, a move which can potentially curtail private credit and imports and re-build forex reserves, if there was a working spot foreign exchange market.
The central bank sold 2.0 billion rupees of 77 day bills at 7.08 percent, 2.0 billion rupees of 84 day bills at 7.18 percent, 91 day bills also at 7.18 percent and 98 day bills at 7.23 percent.
If there was credibility of a soft-peg at 200 to the US dollar, private credit would decline by at least the amount of the bills sold down to the banking system, reduce imports and the central bank would be able to buy dollars in the interbank market as dollar outflows reduced.
However, most sell-downs of the outright portfolio of the central bank is now taken back through the reverse repo window of the central bank.
The central bank had also been selling down maturing bills on its portfolio at recent bill auctions, after price controls were lifted on auctions.
However most of the securities were also ending up in the central bank through reverse repo operations.
On December 03, the central banks outright Treasury bill stock fell to 1,414.67 billion rupees from 1433.91 billion on December 01. However, reverse repo injections went up from 233 billion rupees to 264 billion rupees.
Another 33.75 billion was mopped up through repo auction at 5.97 percent.
Sell-downs however reduces the interest rate risk of the central bank if higher rates are ahead and increase the rate risk of commercial banks by worsening a asset liability mismatch. (Colombo/Dec04/2021)