Sri Lanka rupee slightly weaker, central bank keeps excess liquidity down

ECONOMYNEXT – Sri Lanka’s rupee was quoted at 158.12/15 in early afternoon trade Thursday, slightly weaker from yesterday close of around 157.85/158.10 levels dealers said, while the central bank has kept liquidity tight over the past two weeks.

The one month forward premium was about 75/85 basis points, dealers said with the three months at 250/255, dealer said.

On Thursday the central bank mopped up 4.6 billion rupees from money market at about 7.34 percent.

On Wednesday and overall excess liquidity was 2.8 billion rupees with banks borrowing 9.4 billion rupees and depositing 9.3 billion rupees in the repo window. The central bank mopped up 3.0 billion rupees through a repo auction at 7.34 percent.

Forex market participants say disruptions to tea supplies may reduce export revenues in the coming days, which may affect dollar inflows and perceptions.

However analysts say floods tend to damped economic activity and private bank credit which can strengthen the rupee, while pressure could come if the Treasury has to overdraw state banks substantially to pay for flood relief.

The central bank triggered a run on the rupee by printing money in March and April undermining its peg and then ‘floating’ with excess liquidity of about 20 to 30 billion rupees. It then intervened to bring some stability back to the market.

The central bank is still using some moral suasion but interventions have reduced dealers said.

From the first week of May liquidity was kept tighter, excess liquidity which was 31 billion rupees on April 25 was kept at single digit levels in May. Liquidity was negative on May 17 and 18.

Bank borrowings from reverse repo window 18 billion rupees on May 18 which had fallen to 9.4 billion rupees by May 23. On May 23 liquid banks deposited 9.3 billion rupees at the central bank’s repo window and the central bank mopped up 3.0 billion through a repo auction.





Sri Lanka’s central bank puts pressure on the rupee by printing money through outright Treasury bill auctions, term repo reverse cash injections and also with easy overnight window.

The central bank has depreciated the currency from 4.76 to the US dollar in 1951 since a currency board was abolished to 158 rupees now.

There have been calls to reform the central bank to prevent income from being re-distributed to business owners and the state from workers and citizens from currency depreciation and inflation. (Colombo/May24/2018)

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