Sri Lanka stocks open lower, rupee steady, liquidity short

ECONOMYNEXT – Sri Lanka’s stocks opened lower Monday and the rupee was steady after hitting a new low on Friday, dealers and brokers said with liquidity in money markets kept short by the central bank.

The rupee was quoted at 158.50/60 to the US dollar on Monday in the spot market, from Friday’s close of 158.50/60. The rupee hit an intra-day low of 158.80 to the US dollar on Friday.

Money markets were short on Thursday and Friday after the central bank brought its Treasury bill stock from 50.52 billion rupees to 35.19 billion rupee (not counting reverse repo auctions).

A sell down of central bank held bills causes disappearance of cash from money markets and tends to support a rupee peg.

On May 31 and June 01, the central bank injected 12 billion rupees through overnight reverse repo auctions at a weighted average yield of 8.32 percent as liquidity fell.

Banks that are short borrowed 20.18 billion rupees of new money from the central bank’s reverse repo window at 8.50 percent on Friday, while liquid banks deposited 14 billion rupees in the central bank’s excess liquidity window.

The weighted average overnight repo rate rose slightly to 7.97 percent on Friday from 7.92 percent on Thursday while the maximum rate was 8.25 percent.

Analysts say rates which are above the middle of the 7.25 and 8.50 policy corridor may point to a recovery in credit, though a break in the credibility of Sri Lanka’s soft-dollar peg can also boost lending.

There was however a strong pick up in credit in March, which was partially accommodated by the central bank through the termination of term repo deals.

But further money printing in April triggered a run on the rupee, as the credibility of the peg was broken.





A run on the rupee generally leads of more domestic borrowing by exporters, who will hold dollars while importers will scramble to settle bills early. Importers may also borrow before stocks are sold, triggering a temporary boost in credit.

When the central bank injects long term cash through outright purchase of bills or termination of repo deals, in a time of strong credit demand, the rupee comes under pressure. However overnight injections cause less harm if banks do not use it to fund credit over several days.

On Monday an overnight reverse repo auction for 8.0 billion rupees was called.

Bond were quoted about 10 basis points below the auction last week, dealers said.

A bond maturing on 15.03.23 was quoted at 10.35/42 percent.

A bond maturing on 01.08.26 was quoted at 10.50/55 percent.

A bond maturing on 15.03.28 was quoted a 10.55/65 percent. (Colombo/June04/2018 – Update II)

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