ECONOMYNEXT – Sri Lanka’s forex reserves dropped 254 million US dollars to 6,220 million dollars in March 2016 from a month earlier, with reserves without a swap from India Reserve Bank of India falling to 5,120 US dollars, the lowest seen during the current currency crisis.
The previous low without the 1.1 billion dollars in swaps was reached in January with 5.2 billion US dollars. With the swap reserves hit a low of 6,301 million US dollars in January 2016, central bank data shows.
The 2015/2016 currency crisis began in the first quarter of 2015 and was encouraged by releases of liquidity tied up in term repo deals and a highly damaging rate cut in April 2015 despite state and private borrowings risings.
In March however monetary policy tightened with the effective policy rate going up by over 100 basis points. The average overnight call gilt-backed repo rate rose from 6.97 percent on February 29 to 8.03 percent on March 31, central bank data showed.
The overnight call rate rose from 7.51 percent to on February 29, to 8.09 percent on March 31.
The rate went up as the central bank began to fill liquidity shortages coming from forex interventions on an overnight basis instead of printing large volumes of money permanently to maintain an excess liquidity.
Analysts say maintaining excess liquidity during a currency crisis, was a new low in loose monetary policy for the balance of crisis prone central bank.
In March the central bank sold 432.06 million dollars to defend the currency and bought 10.95 million dollars. Surrenders of dollars flowing into the Treasury are not shown in the data.
If dollars are bought by the central bank (boosting reserves) and cash generated, dollars have to be sold to prevent the currency falling unless the rupees are mopped up.
When the central bank buys Treasury bills and prints money, reserves also have to be sold to ‘mop up’ the cash in forex markets, generating reserve losses.
Banks have been scrambling for deposits and deposit rates are now around 350 to 400 basis points higher than in April 2015, when the central bank gave a leg up to the currency crisis with its rate cut and domestic credit and domestic credit is now financed with deposits.
If domestic credit and deposits are broadly in balance, a so-called ‘float’ of the currency can break the cycle of currency defence and liquidity injections. An attempted float of the currency in September2015 failed due to low interest rates..
Sri Lanka is in discussions with the International Monetary Fund with ministers expecting a deal this week. However analysts warn that even if a staff-level agreement is reach, it will need IMF board approval and some prior actions may also be required.
Over the last two week foreign investors have also bought some rupee bonds.