Sri Lanka injects Rs59bn to clear liquidity shortfall

ECONOMYNEXT – Sri Lanka has injected 59 billion rupees into the banking system through term reverse repo auctions to clear a liquidity shortfall amid currency pressure, market participants said.

The central bank injected 30 billion rupees at 8.17 percent through a one week term reverse repo auction.

Another 29.1 billion rupees were injected overnight at an average rate of 8.10 percent.

An earlier term auction matured this week.

Sri Lanka’s banking system went short of cash last week coinciding with a reversal of a swap.

The central bank has also been intervening in forex markets after the credibility of the peg was lost amid excess liquidity earlier this month. Interventions generate more liquidity shortfalls.

By injecting money at fixed rates the central bank targets the interest rate while through interventions when liquidity is already short, a the short is expanded.

A float is required to restore confidence in the system and end interventions. A higher rate will help curtain credit and fix any currency pressure quicker by curtailing credit. (Colombo/Sept25/2016)

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