COLOMBO (EconomyNext) – Sri Lanka’s overnight money markets were adjusting to recent monetary policy changes ahead of a 30-billion rupee bond auction later in the day, where rates can move up, dealers said.
Overnight gilt-backed repos was quoted around 5.75 to 6.00 percent below the Central Bank’s 6.50 percent window where excess liquidity was deposited due to tax benefits from collateralized lending.
Clean money was quoted around 6.50/70 percent. On February 27, the Central Bank closed a window where cash could be deposited at 5.0 percent which was an anomaly compared to standard monetary policy conducted in other countries.
The collateralized repo rate is still below that of the window rate in another anomaly because Sri Lanka’s Central Bank halted the practice of giving Treasuries as collateral after it ran out of bill to sterilize excess liquidity.
Bids for a 30-billion rupee auction is closing today, with rates expected to move up.
Central Bank Governor Arjuna Mahendran is putting larger volumes to the auction to make the rate more market determined, ending an earlier practice of putting part of the volume on auction and giving bonds private placements later.
The practice has been open to abuse by some bond market players it said.
Sri Lanka’s interest rates have to move up after a revised budget on January 29 expanded spending and the new administration delayed a 1.5 billion US dollar sovereign bond.
The last regime had a practice of selling a sovereign bond early in the first quarter to settle bunched up payment areas of the previous year as well as new spending outlined in the annual budget.
Higher domestic interest rates will help the economy adjust to the new levels of state spending, curb private credit, drive more disposable income towards savings (which can finance more credit) and also give more stability to the exchange rate.