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Ajantha Madurapperum also called for proactive measures to prevent a liquidity shortfall in the festive month of April.

rnrnThe Central Bank cut its discount rates last October, when both repo and reverse repo was reduced by 1 percent to 12 percent and 14 percent, respectively.

rnrnMadurapperuma said that factors that traditionally governed the domestic interest rates; exchange rate stability concerns, Balance Of Payments (BOP) considerations and US dollar interest rates are in favour of a rate cut.

rnrnldblquote Sri Lanka
quote s official reserves have recovered to 4.5 months of exports from the low in year 2000 of 3.1months of exports. Preliminary results also indicate a BOP surplus on the overall basis in year 2001
dblquote , Madurapperuma said in an interview.

rnrnUS dollar interest rates are also expected to remain at low levels in the near future, making the environment conducive for a rate cut, he said.

rnrnThe current double-digit inflation in the country, mainly due to the price adjustments stemming from heavy rupee depreciation in 2001, is also expected ease to a single digit during year 2002.

rnrnldblquote The inflation difference between USA and Sri Lanka is expected to be around 10 percent during 2002. The parity between US dollar interest rates and rupee interest rates would be maintained even with a 50 basis point repo cut in this scenario
dblquote , Madurapperuma said.

rnrnCurrently the yield curve for government securities range from 12.55 percent for 3-month T-bills to 13.88 percent for 3-year bonds.

rnrnDealers expect the short end of the yield curve to come down further in order to increase the yield difference between short term and longer-term bonds.

rnrnldblquote A repo cut at this stage would give strong signal to market that the Central Bank expects to maintain the low interest rate regime
dblquote , Madurapperuma said.

rnrnCommenting about the possibility of a liquidity shortfall during New Year festives season in April, he said, market interest rates that are currently hovering around the 12 percent repo could shift upwards to operate around the 14 percent reverse repo, if a shortfall occurs.

rnrnLiquidity surplus in the money market was around Rs. 2.8 bn last week.

rnrnldblquote The Central Bank should act proactively and pump liquidity to the market in April if it expects to maintain low rates. If the market is short, the reverse repo would become the benchmark rate
dblquote , Madurapperuma said.

rnrnSince there is an additional supply of goods during the festive season, additional liquidity would not cause an increase in inflation, he added.rnrn