TB rate up - 06-03-2013

http://www.cbsl.gov.lk/pics_n_docs/latest_news/press_20130306e.pdf

Inflows To Contain Rates

A banking source reacting to Treasury Secretary Dr. P. B. Jayasundera’s recent comments to a foreign news agency that there will be an alleged rate cut in the second quarter (2Q) of this year said that it’s too early to assess this statement as the 2Q was still a month way.
But with excess liquidity at Rs. 40 billion (see connected story on page 34) buttressed by inflows, conditions are ripe for interest rates to decline, he said.

Inflows when sold to the market or to the Central Bank of Sri Lanka (CBSL) swell rupee liquidity in turn in the system.
To curb inflationary pressure on the economy caused by such excess liquidity, CBSL may use its open market operations by buying such excess through its repo window.

In the alternative it may even sell foreign exchange (forex) to the market from its reserves (ie if it has the luxury of space to so do) at discounted rates in order to mop up excess liquidity, and therewith contain inflationary pressure on the economy.
On the flip side a strong rupee hurts exporters as they get a fewer rupees for their forex.
On the other hand a strong rupee helps importers as they need to spend fewer rupees to buy the necessary forex to purchase the required import.
Further, as Sri Lanka is an import dependent economy, a strong rupee also helps the consumer as they will then have to spend fewer rupees to buy imported essentials such as medicines, sugar and dhal.

A high inflationary environment is conducive for a rate hike in order to attract deposits to the financial system, by offering rates higher than inflation (ie the increase in prices of essential goods and services over a certain period of time-generally in a year or in a month).
Sri Lanka’s year on year change (increase) in inflation as measured by the state controlled Census and Statistics Department’s Colombo Consumers’ Price Index was 9.8% in January, with this figure remaining unchanged last month.

Meanwhile CBSL’s repo rate, ie the rate at which it lends money to the market on an overnight (o/n) basis is currently at 7.50% and its reverse repo rate, ie the rate at which it borrows from the market on an o/n basis is 9.50%.

CBSL last cut its policy rates, ie the repo and the reverse repo in December, by an amount of 25 basis points each.

On the impact on the market because of the current UN sessions on the island’s human rights record which is looked at negatively by the economies that most matter, such as the USA, EU and India-the first two being its biggest export market and the latter its giant neighbour, the source said that that impact has had already been felt with the exchange rate having had depreciated from the Rs. 126.20 levels to its present Rs. 127.50 levels in interbank spot trading against the US dollar, a decline that had occurred within the space of a month (see also The Sunday Leader business pages of 13.1.13.).

Interest Rates Rise

Meanwhile yields of 91 day Treasury (T) Bills from the last week of January 2012 to the last week of January 2013 increased by 9.2% to 9.47%, CBSL data showed.

Similarly, yields of 182 day T Bills during the commensurate period increased by 18% to 10.28% and that of 364 day T Bills by 19.5% to 11.11%.
Meanwhile banks’ average weighted deposit rate (AWDR) during this period increased by 41.2% to 10.38% and their average weighted fixed deposit rate (AWFDR) by 48.5% to 13.53%.

Banks’ average weighted prime lending rate (AWPR) during the review period increased by 24.2% to 14.33% and their average weighted lending rate (AWLR) from December 2011 to December 2012 was up by 18.9% to 15.98%.
CBSL’s policy rate, the repo in the period covering the last week of January 2012 to the last week of January 2013 increased by 7.1% to 7.50% and its reverse repo rate by 11.8% to 9.50%.

However according to latest available data, the increase in yields of 91 day T Bills from the last week of January 2012 to the last week of February 2013 slowed down to 4.8% to 9.09%. Similarly, the increase in the yield of the 182 day T Bill in the review period slowed down to 15.7% to 10.08% and that of the 364 day T Bill slowed down marginally to 19.4% to 11.10%.

But the increase in the AWPR in the latest review period was marginally higher at 24.4% to 14.35%, while the increase in the repo and reverse repo rates remained unchanged at 7.1% and 11.8% to 7.50% and 9.50% respectively.

Meanwhile the yield of the 91 day T Bill in the period end January 2013 to end February 2013 declined by 4% to 9.09%, that of the 182 day T Bill by 1.9% to 10.08%. And in the case of the 364 day maturing T Bill, its yield in the brief one month period under review declined by 0.9% to 11.10%.

However the AWPR in this short one month period marginally increased by 0.1% to 14.35%, but the repo and the reverse repo rates remained unchanged at 7.50% and 9.50% respectively.
Other economic data such as the AWDR, AWFDR and the AWLR as at last month (February) end were not immediately available.
Sunday Leader

Mar 06, 2013 (LBO) - Sri Lanka's Treasuries yields edged up slightly across maturities and Wednesday's auction with the three month yield rising 04 basis points to 11.14 percent, data from the state debt office showed.

The 3-month yield rose 02 basis points to 9.11 percent and the 6-month yield rose 02 basis points to 10.10 percent.

The debt office said 27 billion rupees of bills were sold, with 2.4 billion rupees in 3-month bills, 1.2 billion in 6-month bills and 24.2 billion rupees in one year bolls being sold.

Sri Lanka's Treasury bills yields have fallen sharply below bank deposit rates, with December data also showing that the central government and state enterprises were still borrowing heavily from banks.
http://lbo.lk/fullstory.php?nid=181304175

The point of the above is to show that when foreign currency is converted to rupees, the liquidity in the rupee market increases significantly. The CB has to mop up the liquidity using the Tbill and repo market --> Foreign loans converted to rupee investments.

The banking sector cannot lend due to the credit limit and hence has to park its money with the CB. This contains inflation. --> It also limits the profitability of the banks

I think NO.
Banking sector has no limits in place now. It's good that bank deposits pay higher than TBills, that is correct. Bcs, GOSL is AAA, bank deposits are not.

Tbill rates are down by selling them to foreigners in the recent past, i guess that's why CBSL wants maintain implicit target for the currency to give them comfort. here i guess, the game is quite akward, not economic rule based.

But, there is no scope for rate cut looking at inflation. Further , its silly to let currency to appreciate through inflows hurting the exporter when our exports are already falling rapidly. I trust the growth has bottom out in 4Q12. What we need here not to please foreign creditors to sell bills to cover GoSL's wasteful expenditure, but to create an environment to pick up growth & exports while maintaining price stability & lower import growth.

If anybody think Cabraal's economic is working, that's an utter fool. Thankfully, we have had a nice time with NE is moving to mainstream. That's not CBSL miracle.