Sri Lanka rupee weaker ahead of bond settlement; liquidity short high

ECONOMYNEXT – Sri Lanka’s rupee weakened as much as 146.60 to the US dollars in the one week forward market dealers, said as liquidity shortages pointed to central bank interventions, ahead of the arrival of proceeds of a 1.5 billion US dollar bond sale.

The one week forward dollar was quoted around 146.30/50 in afternoon trade.

In a market crippled by moral suasion the spot next dollar was also quoted around 146.15/40 thought traders are too frightened to actively trade it. There is no spot market for the dollar in Sri Lanka due to moral suasion.

In money markets central bank had pumped in 56 billion rupees of printed money to make up for reserve outflows by Monday.

On July 18, proceeds of a 1.5 billion US dollar sovereign bond is due to arrive in Sri Lanka.

A part of it is likely to be sold to the central bank for rupees, which would fil the liquidity shortage.

Banks are borrowing heavily from the overnight window and reverse repo auctions. Some banks are also borrowing from the window at 8.0 percent and investing or giving facilities to customers to play the government bond market.

When printed money hit the economy as salaries of state workers, imports go up and the rupee comes under pressure.

Market sources say authorities have now started to put moral suasion on some banks that are repeatedly going to the overnight window.

Analysts say unlike putting pressure on currency dealers, who simply convey the message given by dollars created by central bank credit or lender of last minute rupees in the form of import demand, restricting the source of currency pressure – rupee creation – makes economic sense. (Colombo/July12/2016)

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