Sri Lanka interbank liquidity drops, bond yields up
ECONOMYNEXT – Sri Lanka’s excess liquidity in money markets has dropped rapidly over the week, amid some pressure on the rupee and bond yield have moved up, but overnight rates are still steady, dealers said.
Excess liquidity in money markets rose to about 55 billion rupees by August 13, from about 15 billion rupees on July 25.
With the central bank’s Treasury bill stock at 41 billion rupees, the rise in rupee liquidity is indicative of unsterilized dollar purchases to prevent rupee appreciation and defend a peg around 160 to the US dollar amid net inflows either official or private.
Overnight rates also started to fall as liquidity rose. The weighted average overnight repo rate which was around 8.34 percent on July 25, fell to 8.16 percent on August 16.
However to keep policy consistent (unsterilized interventions) the central bank also has to sell dollars and mop up the liquidity if external flows reverse amid a pick-up in credit, rupee bond sales or government debt payments.
Sri Lanka’s rupee usually falls because policy is inconsistent policy where unsterilized interventions are halted whenever outflows reverse.
Excess liquidity dropped to 54.5 billion rupees on August 14, 40.7 billion rupees on August 15 and 34.9 billion rupees on August 16, which may be indicative of a consistent policy of unsterilized dollar sales, analysts say.
In addition the central bank has also mopped up 23 billion rupees of excess cash overnight at 7.53 percent.
While analysts say Sri Lanka may be able to float strongly with a policy rate of 8.50 percent or even a lower rate, the central bank tends to buy dollars to prevent appreciation and switches back to a pegged regime, whenever the rupee strengthens,
The central bank has in the past has also switched from a peg (buying dollars) to floating without killing liquidity first. If the currency is allowed with float with large volumes of excess liquidity, a run can be triggered on the rupee.
Under an IMF program the central bank is forced to collect reserves.
On Friday the rupee opened at around 160.40/50 dealers said, after closing around 160.40/50 a day earlier. The rupee has weakened amid weak sentiment, due to weakening of some emerging market currencies.
Overnight rates have not yet moved up.
On Friday bank call money was around 7.80/90 percent and bank repo was also around 7.80/90 dealers said. Primary dealers were trading repos overnight around 7.80/8.10 percent.
After being stable for about two weeks, bond yields started to move up over the past two days.
A liquid bond maturing on 15.07.2023 was quoted at 9.90/97 up from around 9.87/89 two days earlier.
A bond maturing 01.12.2021 was quoted around 9.65/70 Friday up from 9.55/60 percent two days earlier. (Colombo/Aug17/2018)