Sri Lanka overnight markets recover from moral suasion

ECONOMYNEXT – Sri Lanka’s overnight money market rates appeared to trade freely Wednesday as the market tried to recover from reserve ratio hike and moral suasion a where deals close to 7.0 percent were reversed, but risk the reward structure was still skewed, dealers said.

Sri Lanka’s money markets tightened from January 15 after the Central Bank raised its statutory reserve ratio draining over 40 billion rupees of money printed earlier through monetization of debt.

Money market excess liquidity also rose to 31 billion rupees Tuesday after a 15 billion rupee term repo deal expired and the Central Bank injected 3.0 billion rupees through a reverse repo auction.

Over the last two days authorities used moral suasion to reverse money market deals above 6.85 percent and 7.00 percent in a strong display of moral suasion reaching towards outright price controls.

Over the last few days deals at the higher price end, in the gilt-backed repo market which was not subject to price controls were done at rates of around 7.0 percent, higher than clean deals in money markets

In a well-functioning market higher risk clean money trades a higher yields than the gilt-backed repo market.

The moral suasion came despite the existence of a liquidity window at 7.5 percent.

But in the repo market primary dealers also trade, whose funding costs are higher. Meanwhile some banks also do not accept longer tenor bonds for repos as well as trading limits, which restrict options for some market participants forcing them to borrow at higher rates, dealers said.

Heavy money printing to finance the deficit and the downward manipulation of interest rates have driven credit growth to high levels putting pressure on the currency.

The rupee was quoted around 143.95/144.00 to the US dollar in the spot forex market Wednesday. On Tuesday dealers were pressured by moral suasion to not to buy dollars above 144 to the US dollar.

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In bond markets two year gilts were quoted at 8.80/9.00 percent broadly unchanged from a week earlier, ahead of a weekly Treasuries auction later in the day.

3-year bonds maturing on 01.11.2019 were quoted at 9.35/45 percent.

4-year bonds maturing on 01.05.2020 were quoted at 9.55/75 percent.

5-year bonds maturing on 01.08.2021 were quoted at 9.80/98 percent slightly up from 9.70/85 last week.

9-year bonds maturing on 01.08.2025 were quoted at10.32/38 percent slightly down from last Wednesday.

14-year bonds maturing on 15.05.2030 were quoted at 10.80/90 down from last week

19-year bonds maturing on 15.03.2035 were quoted at 10.80/95 down from last week

A 25-year bond maturing on 01.01.2041 were quoted a 10.85/95 down sharply from the auction weighted average of 12.09 percent.

A state managed fund had been seen buying the bond at 10.80 percent levels giving large profits to primary dealers who bought 2041 bonds at the auction and also shortly after.

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