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Sri Lanka cleans up policy rate system; overnight rates to stabilize: CB Governor

COLOMBO (EconomyNext) – Sri Lanka has ended restricted access to its floor rate window which will stabilize overnight money markets and bring the rate targeting system back to international practice Central Bank Governor Arjuna Mahendran said.

"We cleaned up the system and brought back the normal international practice," Governor Mahendran said.

"Interbank money rates were very volatile (with the restriction). The base rate should be available every day."

Mahendran said there had been no rate hike since the base rate remained the same.

In September the Central Bank limited access to its floor window of its 6.50-8.00 percent policy corridor and forced banks to deposit excess cash at 5.00 percent. The move pushing overnight rates down by about 70 to a 100 basis points, in a back-door rate cut.

But rates spiked on the first few days of every month when access to the 6.5 percent window was open.

On Monday overnight rates rose almost 70 basis points in early deals.

Unbacked overnight money was traded at 7.00/7.25 percent up from around 6.50 percent Friday. Gilt-backed repos traded around 6.70 percent up from around 6.00 percent levels Friday.

In bond markets quotes were wide after an unexpected rise in 30-year bond yields Friday after the state debt office accepted 10 billion rupees of bonds, nine times more than the billion rupees offered to the market at a weighted average yield of 11.73 percent.

In the past few months bond had been placed off-market rates around 9.5 percent but at the last action held in May, 30-year bonds were place at 11.75 percent levels.





Governor Mahendran said the 30-year bonds rates had also now moved back to levels seen before September 2014.

There were bids of 20 billion rupees for the auction and 10 billion was accepted to fulfil cash needs of the government in March, he said.

Dealers who placed bids at little over 10 percent were hit with marked-to-market losses of about 10 million rupees for every 100 million rupees of bills bought for every 100 basis increase.


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