Sri Lanka cuts rates, narrows policy corridor

Nov 18, 2009 (LBO) – Sri Lanka’s Central Bank has cut its main policy rate that injects liquidity into the banking system by 75 basis points to 9.75 percent and the rate at which it drains liquidity by 50 basis points to 7.50 percent. The Central Bank said it had bought dollars from the market and also absorbed the rupee generated in the process. It had sold down most of its Treasury bills, issued its own securities, and also started foreign exchange swaps to absorb liquidity.

“Through these measures, the Central Bank will continue to manage the excess liquidity situation in the domestic market and take appropriate measures to reduce the level of excess liquidity to a more desirable level,” the statement said.

October data also showed that the Central Bank has sold 118.50 million US dollars in the market.

Over recent day the monetary authority had also allowed the rupee to go up slightly

In a pegged exchange rate system, whenever liquidity steadily drained from the banking system (a type quantity tightening), the domestic currency faces upward pressure.

The rupee has been allowed to strengthen to 114.25 from around 114.80 last month.

Wednesday’s rate cut also narrowed the policy corridor. The gap betwe