ECONOMYNEXT – Sri Lanka’s central bank is limiting access to its overnight liquidity facilities from January 16, according to a directive issued to licensed commercial banks.
The standing deposit facility where liquid banks park excess cash at the 14.50 percent policy floor rate will be limited to five times a month.
The overnight standing lending facility where banks which are short borrow new money at the 15.5 percent ceiling rate will be limited to 90 percent of the statutory reserve requirement of a lender.
Most advanced markets have maximum counterparty limits for central bank overnight injections.
On January 02, liquid banks had deposited 339 billion rupees at the central bank. Banks were overall short by 205 billion rupees.
Liquid banks were not lending in the interbank market due to heightened risk perceptions, officials and market participants have said.
Limiting access to the deposit window is expected to encourage liquid banks to lend in the interbank market to earn a return, making the call market more active.
Some liquid banks may also invest some money in Treasury bills, according to market sources. Treasury bills were also considered risky due to downgrade and default as well as domestic debt re-structuring fears.
The central bank has also reduced its bank rate, the final lender of last resort facility to the average weighted new lending rate plus 300 basis points. The earlier rate was the average new lending rate plus 700 basis points. (Colombo/Jan02/2022)