Sri Lanka central bank to buy back short term bills

Oct 30, 2008 (LBO) – Sri Lanka’s central bank has announced auctions to buy back six billion rupees of short term bills at market rates, while overnight liquidity injection volumes were at 21 billion rupees. The Central Bank Thursday offered to buy 2.0 billion rupees of 70-day bills, 2.0 billion rupees of 77 day bills and 2.0 billion rupees of 84-day bills through an auction, injecting money to the market for up to 84-days.

At the moment the monetary authority is also injecting 22 billion rupees to the Interbank market through its discount window facilities largely at 12.00 percent, to cover a liquidity shortage coming from defending a dollar peg at 108.00 rupees.

Market rates are around 19.0 percent.

On Wednesday the Central Bank, a unit of which runs the government’s debt office, rejected all bids to the weekly Treasury Bill auction.

Such actions are usually accompanied by central bank ‘absorptions’ of bills which are repaid with ‘printed’ money, injecting liquidity to the market, and reducing the overnight volumes on its discount window.

When a central bank buys bills, such bills are also repaid with printed money, but it can reduce the tenure of such injections by purchasing partially expired bills.

Liquidity injections while defending a rigid dollar-peg can put further pressure on the currency and reduce high grade liquid assets of the banking system.