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Sri Lanka money markets tighten as BOP pressure builds

ECONOMYNEXT – Sri Lanka’s money markets tightened and excess rupee liquidity dropped as dollar outflows continued to outpace inflows pushing up overnight rates, official data showed, amid expanding domestic credit and capital flight.

Excess liquidity was down by 38 billion rupees by Wednesday to 35 billion rupees from 73 billion on July 30 despite the purchase of Treasury bills by the Central Bank, below the official reverse repo rate of 7.5 percent to print money to sterilize foreign exchange sales.

The Treasury bill stock of the Central Bank, which is a proxy for money printing, rose from 66 billion on July 30 to 80 billion rupees on August 19.

But the drop in excess liquidity showed that sterilization is less than 100 percent of forex sales. Over the last 10 months, sterilization had been 100 percent or more (full sterilization, full intervention), helping keep interest rates down.

Full sterilization was achieved by ending term repo deals and then purchasing Treasury bills outright.

In April rates were cut despite growing domestic credit, helping trigger capital flight in bond markets.

Our economics analyst Bellwether says the central bank is now in the ‘full intervention and partial sterilization’ mode, when interest rates start to move up, despite the outright purchase of some Treasury bills to inject money below the official 7.5 percent policy rate.

On Tuesday 1.87 billion rupees were also borrowed from the 7.5 percent standing facility and on Wednesday it went up to 3.25 billion rupees. The Treasury bill stock also went up to 80.8 billion rupees from 77.5 billion rupees a day earlier.

Overnight money hit as high as 6.60 percent Wednesday, after hitting 6.3 percent Tuesday from 6.05 percent levels last week.

On Thursday, gilt backed repo were done at 6.50 – 6.60 percent levels, clean call money was around 6.25 to 6.35 percent.

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Banks are borrowing from the overnight window despite excess liquidity of 35 billion rupees because most of excess cash is with banks who have exceeded limits to lend to other market participants.

During the last balance of payments crisis, excess liquidity, which remained mainly among foreign banks were around 20 to 30 billion rupees.

At Wednesday’s Treasury bills auction 3-month bills sales were resumed at 6.36 percent. The 6-month yield went up 09 basis points to 6.66 percent and the 12-mont yield also went up 9 basis points to 6.72 percent with only 5.0 billion rupees of bids being accepted.

If the Central Bank purchases more bills at the auction, more liquidity will be injected into the system at below the reverse repo rate. (Colombo Aug20/2015)

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