Market Expects Rate Hike

• Analysis Of T Bill Auction

Wednesday’s Treasury (T) Bill auction saw the shorter 91 day T Bill fall by 12 basis points (bps) to 11.99%, while the weighted average yields (WAYs) for the “longer” tenure 182 and 364 day T Bills climbed up by 10 and nine bps each to 12.40% and 12.58% respectively.
Demand in the market was for the shorter tenure with an expectation of a future policy rate hike, a market source told this newspaper (see also connected story found elsewhere on this page). With price increases effected by the Government on essential goods and services during the past three months coupled with the rupee depreciation after its free float, that has caused inflationary pressure on the economy, tending for rates to rise to arrest such a situation.
Further with import driven credit growth, that has also caused pressure on the exchange rate due to a yawning trade deficit in the current account.
In such a situation the market has greater manoeuvrability when investing in the shorter tenure than investing long, so that it could effect quick changes in an economy where interest rates tend to rise. At this month’s Monetary Policy meeting however, Central Bank of Sri Lanka kept its policy rates unchanged at 7.75% and 9.75%, after hiking the same by 25 and 75 bps respectively on the back of inflationary pressure on the economy, the previous month.
CBSL’s call money rates on Wednesday stagnated at the 9.71% level, while its market repurchase rate nudged up by one bp to 8.73% over that of the previous day’s close, signifying that there is no let up in the pressure for interest rates to go up.
The expected retirement of some of CBSL’s T Bill holdings didn’t take place at this auction, with CBSL’s T Bill holdings as per Wednesday’s data being of an amount of Rs. 211,233.28 million, while an additional amount of Rs. 35,704 million has been surrendered as security to banks on repo transactions, taking up its total T Bill holdings to Rs. 246.9 billion, virtually unchanged over the previous day’s holdings. The following day Thursday, CBSL’s T Bill holdings marginally increased to Rs. 212,458.03 million; while its repo purchases, from both its repo auction and repo window, to drain excess liquidity from the market, marginally declined to Rs. 34,479 million. However that may be, cumulatively, its T Bill stock, maintained its status quo of Rs. 246.9 billion.