Sri Lanka rupee steady, money tighter

ECONOMYNEXT – Sri Lanka’s rupee was quoted at Rs145.10/25 to the US dollar in early trade Friday, marginally weaker than the Thursday’s close of Rs145.00/15, dealers said, while the money markets were tighter, dealers said.

However, money markets were in excess by Rs9.0 billion Thursday, up from a Rs5.1 billion short on Thursday, indicating that the monetary authority has probably bought or swapped dollars to create the liquidity.

On Friday, however, the Central Bank called for a reverse repo auction to inject overnight money.

"Most of the excess liquidity is concentrated among foreign banks," a dealer said.

"You can also see that overnight collateralised borrowings are going at higher rates, because non-bank primary dealers are borrowing."

The weighted average overnight repo (collateralised by Treasuries) rate was 8.58 percent, with the minimum rate at 8.42 percent on Thursday, according to Central Bank data.

Meanwhile, the maximum, minimum and weighted average call rate (clean) was 8.40 percent, with no difference among banks or during the day, strongly indicating that the central bank was putting pressure on banks to manipulate the rate and stop it going above 8.40 percent.

The ceiling of Sri Lanka’s policy corridor where banks can borrow from the central bank’s standing window is 8.50 percent.

The call money market is confined to banks, and primary dealers and other market participant’s deal in the repo market who are borrowing at higher rates. In a well-functioning market, however, the gilt-backed repo rate should have been lower than the unbacked call market.

In the repo market, the maximum rate has been 9.75 percent for some time, where at least one dealer with a higher risk perception is borrowing at a high rate.

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Sri Lanka, like other soft pegged countries, suffers frequent monetary and economic instability because the central bank suppresses markets.

At the moment, Sri Lanka is recovering from a balance of payments crisis, triggered by low interest rates and money printing during 2015.

Allowing liquidity shorts to wind down, mopping up rupees created from dollar purchases (effectively sterilising dollar purchases), the Central Bank stopped allowed excess liquidity to build up from August 29, giving a boost to private credit and halting the collection of forex reserves.

But analysts say the current situation of unsterilised purchases is a major improvement from the steady injection of cash from monetising debt and sterilised forex sales that was seen for most of 2015. Balance of payments crises are triggered in general when a soft-pegged central bank geneates excess liquidity throught the purchase of domestic assets (Treasury bills), which drives credit and imports beyond dollar inflows. (Colombo/Sept09/2016)
 

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