July 15, 2011 (LBO) – Sri Lanka’s central bank has bought 92.5 million US dollars from interbank forex markets in June, ending two months of net selling, official data shows, though newer data points to fresh selling. By June 12, excess liquidity had fallen to 36 billion rupees. Day to day excess liquidity is also affected by bank statutory requirements and circulating note needs of the economy in addition to unsterilized dollar sales.
Sri Lanka however is due to sell a billion dollar bond in international capital markets shortly.
The bond is coming at time when sovereign debt in several European countries has been downgraded and the US has been place on credit watch.
Update II The central bank has bought 100.29 million US dollars in June and sold only 7.7 million in after selling 250 million dollars in the previous two months. The central bank said on July 08, it had met a June foreign reserve target set by an International Monetary Fund program.
The Central Bank was a net buyer in forex markets up to March.
There are excess rupee reserves in Sri Lanka’s banking system which can be loaned out to the broader economy by banks. When excess liquidity goes down an equivalent amount of foreign reserves will also be lost as the country maintains a peg.
Trends in excess rupee reserve movements in commercial banks, point to fresh dollar sales in July.
Excess liquidity in the banking system which fell to 64 billion rupees on June 01 to 48 billion rupees in June 20, rose to 60 billion rupees on June 29 amid dollars purchases.