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Wednesday October 20th, 2021
Bonds & Forex

Sri Lanka rupee hamstrung on decree, bonds slightly up after yield control lifted

ECONOMYNEXT – Sri Lanka’s bond yields were slightly higher on Friday, dealer said after a price control on gilt yields which kept bond buyers away from auctions and led to large scale liquidity injections and forex shortages, was removed.

A 01.12.2024 bond traded at 8.24 percent Friday and was quoted at 8.10/30 percent in late morning trade, dealers said.

The bond was quoted at 8.00/20 levels after the price control was removed on Thurday, after trading around 7.98 percent.

The price controls on bills were imposed in April 2020, and led to large scale liquidity injections as private credit recovered later amid a large budget deficit.

As foreign reserves fell and excess liquidity exited in reserve outflows as convertibility was provided, bond market activity gradually petered off and only one or two maturities around 2024-2026 were traded.

However there was substantial interest on a 2031 auctioned bond at a little over 10 percent.

As foreign reserves ran down the central bank stopped intervening in the market for trade transactions (suspended convertibility) leading to a gradual fall of the rupee to 226/230 levels.

Interbank spot trading was also halted and banks started to only match clients internally and rationing of dollars started.

Banks were then requested to not to sell dollars above 203 to the US dollar despite the lifting of convertibility and continued injections.

Importers are now forced to chase after dollars themselves and persuade exporters to sell to them, market participants said.

While banks settle transactions at the decreed rate, importers make extra payment separately.

Confidence is weak in forex markets and the 230 to the US dollar is also where there is some psychological resistence, market participants said.

Low rupee interest rates had also encouraged dollar deposits, and money printing allowed rupee borrowings without offsetting credit to other sectors to keep the external sector in balance. (Colombo/Sept17/2021)

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