Central Bank mopping up money printed for govt.

http://www.cbsl.gov.lk/pics_n_docs/latest_news/press_20130429e.pdf

Good sign favouring credit demand, inflation and exchange rate..
* CB up-sizes bond issue
* Rupee flat on demand/supply after intervention last week to keep it below 127
* Secondary T-bond market significantly active

The Central Bank’s Treasury bill holdings have fallen significantly by 46.32 percent to Rs. 83.9 billion yesterday (29) from Rs. 156.3 billion at the beginning of the year, the lowest since reaching Rs. 84.3 billion on November 07, 2011.

This is a very good sign that the economy is undergoing a correction. The Central Bank is attempting to remove the money that was printed to finance the government. This would diminish demand for credit, help the rupee strengthen against the US dollar and also reign in inflation, currency dealers said.

The Central Bank’s Treasury bill holding is an indication of the amount of printed money released to the system when it raises additional finances for the government.

The Central Bank expects interest rates would ease during the coming months, making it easier for the private sector to borrow and boost economic growth to 7.5 percent this year after slumping to 6.4 percent in 2012.

The IMF has a more conservative forecast, at 6.25 percent, the UNESCAP has forecast 6.5 percent and the ADB 6.8 percent as the country continues to grapple with deep structural problems in the economy.

According to UNESCAP, Sri Lanka faces three key challenges to higher sustainable growth; high inequality, a high infrastructure deficit and high youth unemployment.

The ADB says: "Economic growth will be subject to constraint from the balance of payments. Larger imports associated with high economic growth will worsen the trade deficit and—unless financed by exports, workers’ remittance, and capital inflow—depreciate the currency. Because of the need to address inflation, the monetary policy stance set at the end of 2012 is not expected to be relaxed, which will restrain economic growth."

It said monetary policy would have to be tight in order to fight off pressures on inflation that would come about from the recent electricity price hike.

Monetary policy would also be tight on account of the government’s heavy domestic borrowings schedule this year, economists have warned. Easing monetary policy or forcing banks to bring down rates would bring down interest rates and boost economic growth, but growth will not be sustainable without structural macroeconomic reforms.

Meanwhile, the Public Debt Department of the Central Bank upsized a Treasury bond auction yesterday (29), mopping up Rs. 3 billion from the system.

The auction was held for bonds amounting to Rs. 2 billion for which bids amounted to Rs. 5.55 billion with the bank accepting Rs. 3 billion of these.

Rs. 1 billion 8 years and 8 months bonds with a coupon rate of 8 percent were sold for an average weighted yield of 11.77 percent while Rs. 2 billion 12 years bonds, a new issue with a coupon rate of 9 percent, were sold for 12.09 percent.

Activity in the secondary market picked up significantly yesterday with yields easing across most tenures, currency dealer said.

The most liquid five year bond yields dipped to 11.37/40 percent from an opening position of 11.38/41 percent. The eight year bond yields dipped to 11.75/83 percent from 11.77/82 percent and the four year bond yield eased to 11.15/25 percent from 11.20/30 percent.

Overnight call money market yield for interbank borrowings eased to 9.40/45 percent from 9.45/50 percent.

The rupee closed flat at Rs. 126.80/85 against the US dollar, from an opening position of Rs. 126.80/86. The rupee opened last week at Rs. 126.65/75 against the greenback.

Last week we saw the Central Bank intervene to keep the exchange rate below 127. But on Monday (29), the exchange rate stayed flat purely on market demand and supply forces, currency dealers said.

Excess liquidity in the banking system amounted to Rs. 25 billion.
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