ECONOMYNEXT – A distruptive drop in excess liquidity earlier in mid-August, just as large scale money printing from lender of last resort windows began at prices near the policy deposit rate, came from a repayment of central bank credit by the Treasury, it has been revealed.
On August 16, the stock of officially declared central bank Treasury bill holding came down to 77.8 billion rupees from 106.09 billion rupees, while the aggregate balance of the banking system dropped to 7.20 billion rupees from 34.61 billion rupees.
Once bought central bank held Treasury bills are a form of sterilization securities (like central bank securities) that can be sold down gradually, to mop up inflows, build forex reserves and stabilze the currency, bringing down interest rates over time, and giving stable enviroment for people to engage in growth creating activities, analysts say.
“If there is a decline in Treasury bill stock of the central bank it will certainly bring down the excess liquidity by that amount,” Deputy Governor Nandalal Weerasinghe told reporters in Colombo.
Deputy Governor S R Attygalle confirmed that the Treasury had repaid 25 billion rupees in central bank credit to the government.
According to central bank data the monetary authority had been printing money through multiple lender of last resort windows near the policy deposit rate from a week earlier.
From August 07, the central bank injected 20 billion rupees into the banking system through its overnight lending facility at 7.83 percent.
By August 22 before the rate cut, money was being printed at 7.60 percent, with the lowest rate at 7.55 percent, just above the 7.50 policy deposit rate.
On August 13, 11.7 billion rupees was printed for 7 days at 7.8 percent, and another 10.5 billion rupees was printed for 7 days at 7.75 percent, gradually reducing lending on from the overnight window.
Until August 22 the central bank then printed up to 34.6 billion rupees though 7 and 14 day through term lender of last resort facilities at near the deposit rate eventually bringing the rate to almost the deposit rate of 7.55 percent.
Meanwhile more money was printed for terms up to 316 days through outright purchases of bills taking the declared Treasury bill stock back to 82 billion rupees.
On Friday 5.0 billion rupees was injected overnight at 7.31 percent after cutting the new policy deposit rate to 7.0 percent, in addition to the 32.1 billion rupees printed from term LOLR facilities.
“The central bank has been conducting open market operations to push the average weighted call money rate towards the lower bound,” Central Bank Governor Indrajit Coomarasamy told reporters.
The central bank’s Treasury bill stock including LOLR facilities is now at an estimated 119 billion rupees based on available data, up from before the ‘Treasury repayment’.
Before active large scale money printing began on August 11, the cental bank last mopped up inflows on July 7, when the bill stock was brought down from 118 to 108 billion rupees. Unsterlized excess liquidity was allowed to built up to 50 billion rupees by July 30.
The rupee soft-peg with the US dollar has broken and it is now sliding. The rupee closed at 175.35/45 to the US dollar on the day of the the last 10 billion rupees of inflows were mopped up. On Friday the rupee closed at 179.70/180.00 in the spot market.
The central bank is now selling dollars to defend its unstable soft-peg with the US dollar from falling further.
“If there is disorderly adjustment which is not aligned with the underlying fundamentals we will intervene in the market,” Central Bank Governor Indrajit Coomaraswamy said.
“In the last three days or so, we think the pressure that has been there in the fx market, is not aligned with the underlying fundamentals
“We’ve seen this massive improvement in the trade account.
“There should be no earthly reason why this should be happening, other than some other factors that have arisen in the last few days.” (Colombo/Aug23/2019)