Sri Lanka central bank opens discount window to primary dealers

August 22, 2007 (LBO) – Sri Lanka’s Central Bank opened its discount window to primary dealers allowing them to get overnight cash after overnight rates hit 49 percent in early trade Wednesday, dealers said. The monetary authority had cut primary dealers off the window earlier in a bid to stop arbitrage on rates with an artificially low policy rate of 12.00 percent.

However the bank is expected to inject cash selectively in the days ahead.

Analysts say the Central Bank restricted access to the window because banks and some primary dealers were using the window to fund asset purchases rather than to meet temporary liquidity needs.

However Sri Lanka has an artificially low policy rate which gives incentives for market participants to borrow at 12.00 percent and lend at higher rates in the market in a lucrative risk free arbitrage.

Rules for access to the window for commercial banks have also been relaxed with banks that are short of liquidity being given cash from yesterday over the six times a month limit imposed earlier.

However banks which borrowed yesterday were turned away today, sending a signal that the window was a ‘last resort’ rather than a first resort, dealers said.

Meanwhile in the forex markets the spot dollar traded at 112.12 with offers moving to 112.18 in intra day trading.

Sri Lanka’s cash market has been hit with liquidity shortages after authorities started to intervene in foreign exchange markets.