Oct 18, 2012 (LBO) – Sri Lanka’s Central Bank will gradually sell down its Treasury bill stock, as they come up for maturity, Governor Nivard Cabraal said, in a move which can strengthen the island’s rupee peg and increase foreign reserves. A T-bill sell-down will stop the rupees from being given as loans by banks, kill demand and reduce the central bank notes (rupees) coming up for redemption in foreign exchange markets in the ensuing period.
A too rapid sell down of Central Bank Treasuries however can stop interest rates falling quickly, deny the use of inflowing foreign capital in the economy and prevent an economy from moving into a fast ‘V’ shaped recovery.
In the aftermath of previous balance of payments crises, when a country is under an IMF program, a combined target of a floor on foreign reserves and a ceiling on reserve money forces Treasury bills to be sold, preventing interest rates from falling rapidly.
A third target on the budget deficit – in the form of a ceiling on domestic borrowing – create conditions in credit markets to make it possible for the first two targets to be achieved.