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Wednesday May 18th, 2022

Sri Lanka stock index down after central bank hikes policy rates

ECONOMYNEXT – Sri Lanka’s stock market closed weaker on Thursday (20) from a near all-time high after the country’s central bank raised its rates by 50 basis points to ease the pressure on the currency and stabilize the external sector, brokers said.

Along with raising the policy rates, the central bank also announced moves to increase dollar liquidity through mandating registered tourist hotels to charge foreigners only in foreign currency and extending the incentive scheme for remittances.

The move is expected to increase both deposit rates and return on fixed assets, analysts say.

The main All Share Price Index (ASPI) closed 0.75 percent or 101.22 points lower on Thursday to close at 13,361.17 points.

S&P SL20 of the more liquid index too fell 0.29 percent or 13.49 points to 4,604.80.

“Today’s rate hike will push the bank rates to 9.5 percent which is still below the 10 percent mark and on top of that, we have a negative real interest rate. So 10 percent is the key threshold where the funds could move out of the market to the fixed income market,” an analyst said.

The rate hike increased the Standing Deposit Facility Rate (SDFR) to 5.50 percent and the Standing Lending Facility Rate (SLFR) of the Central Bank to 6.50 per cent.

Analysts have expected the rate hike after a gap of 5 months saying that it was inevitable as the pressure on the currency grew amid an economic crisis.

An analyst predicted yesterday that with the government saying that it will impose measures to come out of the economic crisis, it has no way other than to increase the rates.

Foreign investors sold a net of 115 million rupees, extending the foreign selling of 2.1 billion rupees so far this year. In 2021, the Sri Lanka stock market suffered a net foreign outflow of 50 billion rupees.

Despite expected better earrings in the December quarter, lingering currency depreciation concerns had weighed on the foreign investor sentiment.

Analysts said people are expecting better earnings from all the companies in the December quarter.

Listed firms have started to release corporate earnings from this week.

The day’s turnover of 7.7 billion rupees, above last year’s daily average of around 4 billion rupees.

Analysts say many investors have been now coming into stocks because of negative returns and see high turnovers these days after the market return jumped to 80 percent last year.

Sri Lanka’s fixed income yields are below 8.50 percent, well below the double-digit inflation recorded in December due to excess money printing by the central bank. As a result, many investors are shifting their funds to risky assets, analysts said.

On Thursday Expolank Holdings, Softlogic Holdings, and Commercial Leasing dragged the index.

Expolanka, the market heavyweight, has export and freight businesses, closed 0.90 percent lower at 386.00 rupees a share, Senkadagala Finance closed 9.02 percent down at 708.25 rupees a share while Commercial Leasing and Finance down 2.76 percent at 28.20 rupees a share.

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