Sri Lanka injects overnight cash to cover reserve ratio hike

ECONOMYNEXT – Sri Lanka’s central bank has announced a 30 billion rupee auction of cash Thursday ahead of hike in the statutory reserve ratio that will take away an extra 1.5 percent from deposits and push up push up intermediation costs.

The SRR is to become effective on January 16, which is a Saturday. Friday is commercial holiday.

The SRR hike is expected to drain more than 40 billion rupees and the reverse repo auction is expected to mitigate any liquidity shock.

On January 18 and 19, 23 billion rupees of cash temporarily mopped up via term repo auctions are due to expire.

The Central Bank has printed tens of billions of rupees to finance the budget deficit and has taken back some of the cash through term repo operations paying interest. Even at the last Treasury bill auction money was printed.

The reserve ratio hike will take out money at no cost to the Central Bank but will impose an ongoing tax on banks by pushing up intermediation costs and lending rates.

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