Sri Lanka rates move up providing support to rupee
ECONOMYNEXT – Sri Lanka rupee closed marginally lower around 168.90/160.20 to the US dollar Wednesday dealers said amid intervention, but market interest rates moved up, providing support to the rupee soft-peg with greenback.
Deals were done around 169.05 to the US dollar Wednesday, market participants said. On Tuesdy the rupee closed almostt around the same level at 168.85/169.05 to the dollar.
The central bank injected 25 billion rupees for 7 days at rates as low as 8.17 percent, at a weighted average yield of 8.20 percent which is 30 basis points below the ceiling policy rate.
The maximum rate touched the 8.50 percent overnight window rate, up from 8.26 a day earlier.
OMO money is much more useful for a bank as it comes shortly after noon, while the window opens for a short time just before markets close.
Another 25 billion rupees were injected overnight at rates as low as 8.05 percent, up to 7.95 percent a day earlier. A 9.2 billion term reverse repo deal matured on Wednesday.
The maximum rate at the auction moved up to 8.30 percent from 8.15 percent and the weighted average yield rose to 8.13 percent from 8.10 percent.
Banks also borrowed another 9.48 billion rupees overnight from the 8.50 window down from 16.49 billion rupees a day earlier.
Interventions widen a liquidity shortfall, requiring sterilization with new money. Sterilized forex sales never end generating continuous falls of reserves. A float can break the cycle.
However, when rates also rise, credit slows and the pressure to intervene and inject more money reduces. When interest rates move up, sterilization of forex sales is less than 100 percent.
In the overnight gilt backed repo market, the weighted average rate rose to 8.19 percent up from 8.08 percent a day earlier.
The maximum rate rose to 8.45 percent from 8.15 percent a day earlier. There were expectations that the repo market would rise, after primary dealers were cut off from the open market auctions on September 25.
But in the interbank call money market, where un-backed money is traded, the weighted average yield moved up to 8.29 percent, up from 8.09 percent a day earlier.
The highest rate moved to 8.40 percent from 8.25 percent.
Meanwhile the 3-month bill yield also rose 49 basis points to 8.56 percent, which is still only 6 basis points above the ceiling repo rate.
Analysts say the rupee came under pressure after the central bank failed to sterilize up to 50 billion rupees of excess liquidity it had created from dollar purchases or swaps and failed in engage in unsterilized defence when the new rupees turned into imports.
Sri Lanka claims to operate a ‘flexible exchange rate’ but the analysts say it is a dangerously inconsistent peg (Sri Lanka is recovering, Central Bank threat looms: Bellwether) which only goes down whenever the economy recovers.
Several measures have been proposed to reform the peg, to stop cost of living being the biggest issue in the country and general political instability.
Several measures have been proposed to reform the peg, to stop cost of living being the biggest issue in the country and general political instability. (What Sri Lanka can do to improve the credibility of its dollar soft peg)
Analysts had also warned that with the soft-peg had to be reformed or abolished outright for free trade to take place. (Sri Lanka’s central bank has to be restrained for free trade to succeed)
Already trading in gold and car imports have been controlled during the start of the current reocvery, in Nixon-shock style actions.
In the 1970s Sri Lanka closed the entire economy as the Bretton Woods system of soft-pegs collapsed while the Fed tried to close an ‘output gap’ by printing money. (Colombo/Sept26/2016)