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Ceylon Finance Today: Market's excess liquidity declined by a massive
Rs 5,523.74 million on Friday's trading, weighed down by Central Bank's (CB's) protection of the US dollar, currently at
Rs 133.30 in spot trading.
Pressure on the rupee to depreciate is due to Sri Lanka running a current account deficit in the balance of payments. This is exemplified by the fact that at the week ended Wednesday (13 May), the Treasury (T) Bill and T Bond market suffered a net foreign outflow of Rs 1,650 million.
Such outflows are attributed to the current political instability in the country due to a minority government in power.
Based on the current spot rate, this translates to a US$ 12.38 million outflow effectively meaning that CB, from its foreign reserves, subsidises such outflows, while at the same time depleting its foreign reserves. Foreign transaction in the T-Bill and T-Bond market are done on spot basis. However, the current, administered spot price of Rs 133.30 is unrealistically high.
Nevertheless, CB doesn't want the spot to depreciate "more," because that would make imports "too" expensive. Sri Lanka runs a trade deficit. It even has to depend on imports to meet its staple food, ie its rice requirements, due to the recent decline in harvests because of the vagaries of the weather.
Government's foreign debt servicing too is met from CB's foreign reserves on spot basis. Therefore, a sum of Rs 5,523.74 million according to Friday's spot rate translates to US$ 41.44 million flying out from CB's foreign reserves. A weak spot would also make such transactions more expensive in rupee terms.
Another reason for the decline in excess liquidity may be due to the fact that banks' have to meet CB's statutory reserves' ratio requirement of 6% on Friday.
Meanwhile, with CB's Treasury Bill holdings at a massive figure ofRs 60,235.62 million by the weekend, those comprised 51.5% of market's excess liquidity, a 4.04% increase over the previous day Thursday's percentage figure of 49.5%. Market's excess liquidity as at Friday was Rs 116.9 billion.
The danger in uplifting excess liquidity by CB buying T-Bills, ie money printing, is that it may fuel demand side inflationary pressure on the economy, hitting the poor and the fixed wage earner the hardest. Ideally, to change the situation, the government should encourage debt free inflows in to the country and thereby uplift market's excess liquidity, by buying those and uplifting its foreign reserves, while at the same time fuelling rupee excess liquidity in the money market.
Meanwhile, the weighted average rate of call money remained stagnant at 6.13%, while that of overnight market repo transactions fell by 23 basis points to 5.89% by Friday's holdings.
Courtesy: Ceylon Financial Times 17 May 2015
Rs 5,523.74 million on Friday's trading, weighed down by Central Bank's (CB's) protection of the US dollar, currently at
Rs 133.30 in spot trading.
Pressure on the rupee to depreciate is due to Sri Lanka running a current account deficit in the balance of payments. This is exemplified by the fact that at the week ended Wednesday (13 May), the Treasury (T) Bill and T Bond market suffered a net foreign outflow of Rs 1,650 million.
Such outflows are attributed to the current political instability in the country due to a minority government in power.
Based on the current spot rate, this translates to a US$ 12.38 million outflow effectively meaning that CB, from its foreign reserves, subsidises such outflows, while at the same time depleting its foreign reserves. Foreign transaction in the T-Bill and T-Bond market are done on spot basis. However, the current, administered spot price of Rs 133.30 is unrealistically high.
Nevertheless, CB doesn't want the spot to depreciate "more," because that would make imports "too" expensive. Sri Lanka runs a trade deficit. It even has to depend on imports to meet its staple food, ie its rice requirements, due to the recent decline in harvests because of the vagaries of the weather.
Government's foreign debt servicing too is met from CB's foreign reserves on spot basis. Therefore, a sum of Rs 5,523.74 million according to Friday's spot rate translates to US$ 41.44 million flying out from CB's foreign reserves. A weak spot would also make such transactions more expensive in rupee terms.
Another reason for the decline in excess liquidity may be due to the fact that banks' have to meet CB's statutory reserves' ratio requirement of 6% on Friday.
Meanwhile, with CB's Treasury Bill holdings at a massive figure ofRs 60,235.62 million by the weekend, those comprised 51.5% of market's excess liquidity, a 4.04% increase over the previous day Thursday's percentage figure of 49.5%. Market's excess liquidity as at Friday was Rs 116.9 billion.
The danger in uplifting excess liquidity by CB buying T-Bills, ie money printing, is that it may fuel demand side inflationary pressure on the economy, hitting the poor and the fixed wage earner the hardest. Ideally, to change the situation, the government should encourage debt free inflows in to the country and thereby uplift market's excess liquidity, by buying those and uplifting its foreign reserves, while at the same time fuelling rupee excess liquidity in the money market.
Meanwhile, the weighted average rate of call money remained stagnant at 6.13%, while that of overnight market repo transactions fell by 23 basis points to 5.89% by Friday's holdings.
Courtesy: Ceylon Financial Times 17 May 2015
