Sri Lanka excess liquidity up, rates lower

July 06, 2012 (LBO) - Excess liquidity in Sri Lanka's interbank markets have topped 20 billion rupee over the past three days easing tighter monetary conditions that prevailed a week earlier, official data show. If not the Central Bank will have to sell the collected dollars to prevent the exchange from being depreciated by the excess liquidity that begins to flow out.

In forex markets the rupee was quoted around 133.

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70/80 rupees against the spot US dollar in late morning trade after opening slightly wider at 133.70/90 levels dealers said.

In bond markets, 2-year bonds maturing on 01.04.2014 quoted wide around 13.35/50 percent levels, dealers said.

Three maturing on 15.07.2015 were quoted around 13.85.93 levels. Trading was thin dealers said.

Update II On Friday overnight gilt backed repos were quoted around 9.35/50 percent below the policy rate of 9.75 percent and un-backed call money was at 10.40/50 percent, dealers said.

The weighted average repo rate has fallen from 9.68 percent on June 22 to 9.41 percent, which is over 30 basis points below the policy rate of 9.75 percent.

The weighted average call rate has eased from a peak of 10.64 percent on June 22 to 10.40 percent Thursday.

Excess liquidity rose to 26 billion rupees on Wednesday and remained at 21.

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8 billion rupees on Thursday.

Excess liquidity was withdrawn through a repo cash auction at 9.31 percent Thursday slightly higher than 9.26 percent a day earlier, but also 44 basis points below the policy reverse repo rate.

Analysts have urged the Central Bank to kill excess liquidity coming from foreign exchange purchases (to sterilized the purchase) by outright sales of its Treasury bill stock to prevent them being loaned out and creating fresh import demand.

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If 13.4 billion rupees of excess liquidity is killed, analysts say about 100 million dollars of what people call 'foreign exchange savings' can be achieved in the days and weeks ahead, allowing the monetary authority to strengthen the exchange rate.

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