ECONOMYNEXT – Sri Lanka’s spot rates have turned negative again as dollar liquidity tightened at the 203 to the US dollar non-credible pegged rate as dollar liquidity tightened amid rupee liquidity injected to sterilize a short from a reserve ratio hike.
Sri Lanka’s central bank raised the Statutory Reserve Requirement by 2.0 percent from September creating a large liquidity short and then filled it and other intervention with 87 day money and outright purchases of Treasury bills.
This was done amidst attempts to get crippled bond markets working, allowing rates to adjust.
There had been only one successful bill auction recently as rate adjusted.
Though importers are now progressively allocated dollars at 203 and some are getting dollars at higher rates through various means.
Banks have severely restricted letters of credit to ration dollars, amid the liquidity injections of the central bank.
This week the spot/1 month was quoted at a negative -10/00 cents.
Spot/2 months a negative -20/00
Spot/3-months -60/-40 202.40
The strict re-imposition of the non-credible peg at 203 and the reduction of dollars cleared at a ‘floating rate’ has also led to the central bank providing dollars for imports as the liquidity injected came up for convertibility.
A central bank that continues to inject money to sterilize interventions (a non-credible peg) faces depletion of reserves. (Colombo/Oct20/2021)