Rs 32.4B in foreign investments exit Govt. securities market

SHARK aka TAH wrote:Central Bank of Sri Lanka (CBSL) statistics show that
Rs 32,368.3 million (Rs 32.4 billion) in foreign investments have exited from the government securities (Treasury (T) Bonds,
T Bills) market in the past one and half months.


Foreign investments in government securities in the review period had declined by 6.5% (Rs 32.4 billion) to
Rs 469.1 billion causing pressure on the rupee to depreciate, data showed.
"It's this exit that is causing pressure on the rupee to depreciate," sources told Ceylon Today.
The exchange rate (ER) in the past month has had depreciated by 55 cents to Rs 130.85 to the US dollar as a result, they said.
However, CBSL is currently dissuading importers from buying dollars beyond the Rs 130.85 level by applying 'moral suasion' on importer banks. Sri Lanka is an import dependent economy, importing essentials such as rice and medicines. Therefore, a weaker rupee will hit the consumer the 'hardest'.


This is in the backdrop that the next Presidential Election is due in another two months time, in January. In a scenario where prices are skyrocketing due to a weaker rupee, it may be difficult for the incumbent President, Mahinda Rajapaksa, to stay on course for a third term, in such a developing scenario, hence the reason for the CBSL to protect the rupee, they said.
Therefore, the application of moral suasion pressure by CBSL on importer banks, by artificially keeping the rupee 'up' at Rs 130.85 by applying pressure on importer banks not to buy dollars beyond that value.
Sources said that the current low interest rate regime is to be blamed for foreigners exiting from the government securities market. "CBSL realized their mistake, that is why they reintroduced repo auctions from the beginning of this month, in order to push their 5% base rate by another 1% more to 6% at the beginning of the month," they said.


CBSL interest rates are considered by the market as the base rate to decide on their interest rate regime.
Sources further said that due to foreign exits from the five-year maturing T Bonds, their yield which was a low 6.70% prior to the 23 September 2014, monetary policy meeting, has since gone up by 0.70 percentage points to 7.40%.
A low interest rate regime, a stable exchange rate, seasonal import demand and exporters holding on to their dollars with the expectancy of getting a better return due to foreigners exiting from the market, have also created a situation conducive for foreigners to get out from the government securities market, thereby causing pressure on the rupee to depreciate further, they said.


And, with the recovery of the US economy and the expected rise in interest rates in the world's largest economy, that makes it more conducive for foreigners to invest in the US market than in the Sri Lankan market, the sources said.
A number of T Bonds with foreign holdings is maturing next year, and if they exit in the context of a strengthening US economy coupled with a rising interest rate regime there, that will cause further pressure on the rupee to depreciate, they said.
Worldwide, the dollar has been appreciating, but only in Sri Lanka it's not allowed to gain, the sources said. This has not been happening now, but in the past few months, long before the holding of a snap Presidential Poll came into the fore.
But CBSL kept the ER artificially pegged 'up' at
Rs 130.30 for a long time, instead of allowing it to gradually depreciate, they said. That may have had eased the pressure, the sources said.

RPPA wrote:

SHARK aka TAH wrote:Central Bank of Sri Lanka (CBSL) statistics show that
Rs 32,368.3 million (Rs 32.4 billion) in foreign investments have exited from the government securities (Treasury (T) Bonds,
T Bills) market in the past one and half months.


Foreign investments in government securities in the review period had declined by 6.5% (Rs 32.4 billion) to
Rs 469.1 billion causing pressure on the rupee to depreciate, data showed.
"It's this exit that is causing pressure on the rupee to depreciate," sources told Ceylon Today.
The exchange rate (ER) in the past month has had depreciated by 55 cents to Rs 130.85 to the US dollar as a result, they said.
However, CBSL is currently dissuading importers from buying dollars beyond the Rs 130.85 level by applying 'moral suasion' on importer banks. Sri Lanka is an import dependent economy, importing essentials such as rice and medicines. Therefore, a weaker rupee will hit the consumer the 'hardest'.


This is in the backdrop that the next Presidential Election is due in another two months time, in January. In a scenario where prices are skyrocketing due to a weaker rupee, it may be difficult for the incumbent President, Mahinda Rajapaksa, to stay on course for a third term, in such a developing scenario, hence the reason for the CBSL to protect the rupee, they said.
Therefore, the application of moral suasion pressure by CBSL on importer banks, by artificially keeping the rupee 'up' at Rs 130.85 by applying pressure on importer banks not to buy dollars beyond that value.
Sources said that the current low interest rate regime is to be blamed for foreigners exiting from the government securities market. "CBSL realized their mistake, that is why they reintroduced repo auctions from the beginning of this month, in order to push their 5% base rate by another 1% more to 6% at the beginning of the month," they said.


CBSL interest rates are considered by the market as the base rate to decide on their interest rate regime.
Sources further said that due to foreign exits from the five-year maturing T Bonds, their yield which was a low 6.70% prior to the 23 September 2014, monetary policy meeting, has since gone up by 0.70 percentage points to 7.40%.
A low interest rate regime, a stable exchange rate, seasonal import demand and exporters holding on to their dollars with the expectancy of getting a better return due to foreigners exiting from the market, have also created a situation conducive for foreigners to get out from the government securities market, thereby causing pressure on the rupee to depreciate further, they said.


And, with the recovery of the US economy and the expected rise in interest rates in the world's largest economy, that makes it more conducive for foreigners to invest in the US market than in the Sri Lankan market, the sources said.
A number of T Bonds with foreign holdings is maturing next year, and if they exit in the context of a strengthening US economy coupled with a rising interest rate regime there, that will cause further pressure on the rupee to depreciate, they said.
Worldwide, the dollar has been appreciating, but only in Sri Lanka it's not allowed to gain, the sources said. This has not been happening now, but in the past few months, long before the holding of a snap Presidential Poll came into the fore.
But CBSL kept the ER artificially pegged 'up' at
Rs 130.30 for a long time, instead of allowing it to gradually depreciate, they said. That may have had eased the pressure, the sources said.

I am totally agree with the above data. But it's my duty to give some clarification on the above article.

Firstly the maximum cap that the foreigners hold is 12.50% (20% was wrong) of the issued volume of some 3.2Trillion. As at september it was fully subscribed by foreigners. So we can say the there is enough foreign demand for SL sovereign product.

The selling of 34.4Bn is therefore only 0.05% of the total holding. And the foreign holding as per now is about 12%. That is why the secondary market bond rates went up by 0.50%. Where they took the opportunity of making some capital gains.

But due to the demand for the product we can expect the amount sold to be refilled by foreigners soon rather than later to smooth off the currency pressure.

Where it will be done by a private placement by CBSL, which will not be published in open markets.We can get to know about it only when the total holding get adjusted.

THANKS