Sri Lanka rupee ends firmer near 192.25/193.00 to the dollar

ECONOMYNEXT – Sri Lanka rupee closed around 192/193.00 in the spot-next market on Wednesday firmer from yesterday’s 195.50/196.50 levels, while bond yield picked up slightly after a bond auction, dealers said.

The rupee closed around 195.50/196.50 to the US dollar on Tuesday.

Excess liquidity in Sri Lanka’s money markets had been dropping steeply in recent days amid unsterilized dollar sales. Lower levels of liquidity can reduce the pressure on the currency but short term interest rates have not yet moved.

The central bank also stopped the forward forex market where money printing and tax cuts are triggered downgrades and pushed up yields on dollar bonds to above those of rupee bonds.

As a result forward premiums fell, making it cheaper for importers to hedge forward, triggering demand for spot dollars by providers of forward cover.

“Because money was printed and there was excess liquidity the spot purchases are made with printed money, which is similar to actual imports being made with printed money,” explains EN’s economic columnist Bellwether.

“It is current imports made with printed money is what usually puts pressure on the rupee in Sri Lanka.

“Similarly net open positions (NOPs) which are financed with actual deposits cannot put pressure on the currency. Banks are which are not borrowing from the window cannot put pressure on the currency. They crowd out imports by increasing their NOPs, and putting pressure on rates.

“However if a Treasury bill auction is rejected and some Treasury bills are turned into rupees (reserve money), they will also put pressure on the currency when credit picks up.

“That is why cutting NOPs has never helped in stabilizing the currency in the past. Cutting NOPs reduces the depth of the market and stop day to day imbalances in the the supply and demand of foreign currency being smoothened out and increases the volatility of the peg (undermines credibility) and worsens panic.

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The fundamental problem is not NOPs or forwards or swaps, but any transaction made with central bank re-finance.”

Sri Lanka first controlled imports, then stopped banks from buying sovereign bonds and earlier this week closed the forward market. The move has also hit the forex swap market.

In bond markets yields were slightly higher after a bond auction.

Sri Lanka’s debt office auctioned 75 billion rupees at a bond auction held today and 55.5 billion rupees were raised.

A bond maturing on 15.12.2022 closed at 5.42/50 per cent on Friday, steady from 5.42/47 per cent at the previous day’s close.

A bond maturing on 01.10.2023 closed at 5.50/60 per cent, down from yesterday’s 5.70/75 per cent.

A bond maturing on 01.12.2024 closed at 6.33/37 per cent, up from 6.30/33 per cent a day earlier.

A bond maturing on 01.05.2025 closed at 6.45/55 per cent, up from 6.40/50 per cent on Tuesday’s close.

A bond maturing on 01.02.2026 closed at 6.67/75 per cent up from yesterday’s 6.65/75 per cent.
A bond maturing on 15.08.2027 closed at 7.10/20 per cent up from 7.05/20 per cent at yesterday’s close.

A bond maturing on 01.07.2028 closed flat at 7.20/40 per cent.

A bond maturing on 15.05.2030 closed flat at 7.55/75 per cent on Wednesday.

(Colombo/Jan27/2021)

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