Sept 21, 2015 (LBO) – Sri Lanka’s debt market was watchful on Monday after International Monetary Fund remarks that the central bank could adopt a tightening bias.
The bond market cramped up with thin trading, dealers said, as secondary yields of five year bonds ticked up slightly by 5 basis points.
On Friday, the IMF said it found the overall financial system stable and current monetary stance appropriate, but “recommended vigilance given rising core inflation, the resurgence of private credit, and signs of receding slack in the economy.” “In this context, a tightening bias appears prudent,” it said.
The central bank’s next policy announcement is scheduled for Friday at 6.00 pm.
Holding of bills and bonds by the central bank increased to 170 billion rupees on Friday from 151 billion rupees earlier in the week. The commensurate liquidity surplus increased to 73 billion rupees on Friday from 48 billion rupees the previous day.
“Some of the surplus is with foreign banks who face interbank limits on lending,” a dealer said, suggesting the effective surplus may be lower.
A foreign outflow from the government securities continued last week with an outflow of 38 million dollars applying downward pressure on the rupee.
Sri Lanka’s deflation was unchanged at 0.2 percent in August, from July, and is expected to increase to three percent by the end of the year.
“Headline inflation is currently near zero but is expected to end the year around 3 percent. Core inflation has risen steadily since the beginning of the year, consistent with higher demand for domestic non-tradables and a gradual reduction in economic slack,” the IMF said.
Commenting on the cramping in the secondary market on Monday, a dealer said: “In the past, when the IMF makes such statements, the central bank tends to do the opposite.” He believes an immediate tightening stance by the central bank is not likely.