Sri Lanka’s central bank mops up some excess liquidity

ECONOMYNEXT – Sri Lanka has started to mop some excess liquidity from money markets with term repurchase and outright securities sales, over the last week, dealers said.

A term repo auction on Monday will mop up 8.2 billion rupees of excess liquidity at settlement Tuesday, from interbank money markets which are flushed with printed money, generating balance of payments pressure.

The Central Bank offered 10 billion rupees of Treasuries for 10 days Monday and accepted bids for 8.2 billion rupees at 6.05 percent to be settled Tuesday. On Tuesday another term repo auction was held for settlement the same day where 8.625 billion rupees was mopped up for 6.08 for 7 days.

The term auction to withdraw liquidity was the first since February 27. On November 30, the Central Bank also had an outright sale of Treasuries, the first since April 24, though data showed the move only neutralized some new liquidity.

Last week the Central Bank sold 3.0 billion rupees of its bills outright for Friday settlement, after rejecting bids for a weekly Treasury bill auction.

Though bill were rejected excess liquidity in money markets fell from 130 billion rupees to 115 billion rupees indicating that some debt settle or sold out of its holdings.

The moves are unusual for the monetary authority which has been injecting liquidity, building up unprecedented levels of excess liquidity amid state and private credit growth in 2015, which critics say is descent into imprudent monetary policy not seen perhaps since 2004.

From early 2015 the Central Bank first released liquidity tied up in term repo auctions and then printed money by outright purchase of Treasury bills to keep rates, inject unsustainable demand into the economy and precipitate a currency crisis and credit bubble and foreign reserve losses.

When excess liquidity is loaned out by banks and spent entering import demand and balance of payments pressure, the Central Bank has to sell dollars to ‘mop up’ the excess rupees though currency defence in the forex market.

If the currency is not defended, the rupee will fall. The rupee has already crashed from 131 to 143 to the US dollar so far this year.

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If liquidity is mopped up in by domestic operations by the Central Bank, there is no excess rupees to generate an external balance of payments crisis or a domestic asset-price bubble or a combination of both.

Commercial banks will also be forced to find real deposits through higher interest rates or limit their lending to real deposits raised by curbing consumption. On Monday excess liquidity dropped from 115 to 110 billion rupees, indicating steady dollar outflows. (Colombo/Dec08/2015)

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