Government of Sri Lanka’s (GoSL’s)/Central Bank of Sri Lanka’s (CBSL’s) exchange rate (ER) policy came under flak by a banker on Tuesday.
He said CBSL by selling the ER at a discount was fuelling consumption led credit growth.
“When CBSL could earn Rs. 110/50 for a US dollar ($) they are selling the same at a subsidized rate of Rs. 110/10*, the source said, adding that CBSL as a result was losing 40 Sri Lanka cents (SLc) on each $ sale.
Globally the $ was on an ascent against other major international currencies, what CBSL is doing is to go against the tide, he said.
The source further said that the ER which had a reprieve for a few days has again started to feel pressure due to import demand. This demand again grew ascendancy from last week. Import demand fuels credit growth and that causes pressure on the ER, which in turn causes pressure on interest rates, he said.
What CBSL is trying to do is to protect both the ER and interest rates, the source said.
However due to excess liquidity in the market CBSL is able to tame the tiger that is interest rates for the moment. But when the market goes short, then the problem begins, the source said.
According to available data, credit to the private sector on a year on year (YoY) basis grew by 34% to Rs. 1,730.3 billion in July.
CBSL which resumed open market operations (OMO) in order to mop up excess liquidity from the market after a lapse of 11 months on Monday drew in Rs. 20.7 billion on Tuesday as opposed to a fractional Rs. 129 million the previous day Monday.
The market on Monday demanded a 7.20% interest from CBSL, but CBSL took only an infinitesimal amount at 7.08% giving an indication to banks that their OMO rate is 7.08% and not more than that. The banks got the message and the following day Tuesday asked for that rate and got it from CBSL, he said. Otherwise they would have had to bank their excess liquidity under CBSL’s overnight repo rate is which is a low 7%, he said. CBSL’s repo window took in Rs. 10.8 billion worth of excess liquidity on Tuesday as opposed to Rs. 39.4 billion the previous day (see also page 39).
Meanwhile the repo auction at 7.08% the following day Wednesday absorbed Rs. 27.1 billion worth of excess liquidity from the market, while the standing facility at eight basis points less, at 7%, took in a mere Rs. 2.4 billion. On Thursday the repo auction took Rs. 22,369 million while the standing facility Rs. 3,702 million. On Friday CBSL’s repo absorbed Rs. 26.071 billion and the standing facility none.
The source said that CBSL which previously lowered its one year Treasury (T) Bill rate administratively from 7.35% to 7.25% (it went up by one basis point after stagnating at 7.25% for several weeks at the September 14 auction), may now have to allow that rate to again go upto the 7.35% in the light of the OMO auction rate going at 7.08%.**
Meanwhile a CBSL source expected pressure on the ER to diminish towards the year end due to remittance inflows on account of the season coupled with tourism receipts.
A commercial banking source however said that there were more outflows than inflows at Friday’s trading, but market’s excess liquidity had put a cap on pressure for a rate rise, he said.
*It has since been depreciated by 20 Sri Lanka cents (SLc), first by 10 SLc to Rs. 110/20 on Wednesday, followed by a similar depreciation to Rs. 110.30 the following day Thursday.
** At Wednesday’s primary T bill auction the 364 day tenure (one year) went up by four basis points (bps) to 7.30%, while the 91 and 182 days went up by three and two bps to 7.14% and 7.22% respectively. In secondary market T Bond trading, T bonds of three, four and five year tenures went up by 10 bps each to 8.20%, 8.65% and 8.80% respectively, with these yields holding on the following day Thursday.