Sri Lanka overnight rates slide with excess liquidity

ECONOMYNEXT  – Sri Lanka’s overnight rates are touching 8.0 percent with excess liquidity climbing to 55 billion rupees, and a rupee soft-peg hovering around 160 to the US dollar, dealers said.

Unbacked call money was quoted around 8.05/8.10 levels which bank repo were around 7.95/8.05 percent dealers said while primary dealers were quoted around 8.20/25 percent Monday, August 13, 2018.

On Friday excess liquidity in money markets were around 55 billion rupees, up from 31 billion rupees at the beginning of the month.

Central bank data showed that the weighted average repo rate had fallen to 8.03 percent on Friday from 8.26 percent at the beginning of the month.

Bond yields have also fallen accordingly.

The central bank stopped mopping up excess liquidity at 7.75 percent overnight on March 31 and has allowed liquidity to build up at its 7.50 percent window.

Excess liquidity builds up without money printing when a peg is defended and dollars are purchased by the central bank to stop the rupee from appreciating when credit moderates.

There is now some credibility of the peg at around 160 to the US dollar with exporters expecting the central bank to defend the currency around those levels, dealer said.

With excess liquidity at 55 billion which is not permanently mopped up, dollar outflows could spike if there is a surge in credit analysts say.

On Monday the rupee was quoted at 160.05/15 levels. If the rupee is not defended in the presence of heavy excess liquidity, or the liquidity is not permanently mopped up by Treasury bill sales, pressure could re-emerge on the currency, analysts say.





The central bank triggered a minor run on the currency in May by printing large volumes though terminating term repos, outright purchases of Treasury bills and overnight and term repo injections in April as rates spiked.

There is an outstanding 41 billion rupees of bills with the central bank from the currency pressure triggered in April and May.

Analysts have called for several measures to improve the credibility of the peg and restrain overly lax domestic operations of the central bank, which is the primary underlying reason for balance of payments trouble (What Sri Lanka can do to improve the credibility of its soft-peg: Bellwether).

But ideological belief policymakers – diametrically opposite from high performing East Asian nations – that the path to prosperity lies in unsound money and permanent currency depreciation also contributes to the problem. 

In 2017 the Sri Lanka rupee depreciated while high performing East Asian nations appreciated as the dollar weakened.

The Chinese Yuan appreciated 6.6 percent, the Thai Bhat appreciated 9.5 percent, Taiwan dollar 9.5 percent, Korean Won 13 percent, Singapore dollar 8.1 percent the Malaysian Ringgit 10.4 percent. Hong Kong has a currency board and its curency does not move from 7.8 to the US dollar and it is ignored by mainstream media and interventionist policy makers.

Phillippines and Indonesia, the lagging nations of East Asia which exports labour to the Middle East like Sri Lanka depreciated along with Sri Lanka. Even the Indian rupee, which is hardly an example to follow has appreciated 6.6 percent. (Colombo/Aug13/2018)

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