Heavy moral suasion, selective intervention steadies shaky rupee

http://www.cbsl.gov.lk/pics_n_docs/latest_news/press_20130703ea.pdf

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* Import demand, foreign bond sales after Moody’s downgrade pressurise currency
* New data shows bank lending rates went up when monetary policy rates came down

Heavy moral suasion and direct dollar sales to selected banks by the Central Bank to cover import bills and Treasury bond sales by foreigners saw the rupee hold its ground against the US dollar yesterday (03) amidst depreciation pressure, currency dealers said.

"The rupee closed at the same range it opened, Rs. 130.60/65 against the US dollar with the currency coming under depreciation pressure on importer demand and foreigners selling down their Treasury bill holdings. Moral suasion was evident with the Central Bank selling dollars to those banks needing dollars to cover import bills and accommodate foreign bond sales," a dealer said not wanting to be named.

Another dealer said moral suasion was ‘heavy’.

Dealers said the sovereign rating outlook downgrade from ‘Positive’ to ‘Stable’ by Moody’s on Tuesday may have stoked some concerns. "We did not see bond sales by foreigners on Monday and Tuesday," dealers said. The Central Bank yesterday said Moody’s latest report was ‘ill-advised’, ‘backward-looking’ and ‘contradictory’.

Last week, foreigners pulled out a little more than Rs. 5 billion from Treasury bond and equity holdings.

The Central Bank said it would intervene to prevent sharp fluctuations in the currency.

Benchmark Treasury bill yields stayed flat at yesterday’s primary market auction despite a cut in the banking sector statutory reserve ratio by 200 basis points last week with new data showing a 75 basis point monetary policy rate cut did not bring down bank lending rates but increased them.

The Treasury bill auction was for Rs. 12 billion in maturing bills with the Central Bank accepting bids worth Rs. 10.6 billion from a total of Rs. 31.35 billion.

The three-month bill yield fell a marginal one basis point from last week to 8.65 percent; bids received Rs. 1,534 million, accepted Rs. 379 million.

The six month yield was unchanged from last week at 9.70 percent; Rs. 500 million accepted from bids amounting to Rs. 4,950 million.

The 12-month Treasury bill was also unchanged at a 15-month low of 10.66 percent from last week with bids amounting to Rs. 24,875 million of which only Rs. 9,539 million was accepted.

The Central Bank had cut the statutory reserve ratio from 8 percent to 6 percent in order to bring down market lending rates and spur economic growth.

A 75 basis point monetary policy cut since last year saw only the government benefit in terms of falling securities yields, whereas market lending rates had actually increased up to May 2013.

According to data published by the Central Bank last Friday (June 28), the average weighted lending rate of the commercial banking system was 16.25 percent as at end May 2013, up from 14.59 percent a year ago.

Secondary market Treasury bond yields increased yesterday with the more liquid five year bond yield increasing to 11.39/41 percent from Tuesday’s 11.33/36. The eight year yield moved up to 11.55/70 percent from 11.50/65 percent.
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