Sri Lanka halts overnight open market operations

Oct 20, 2010 (LBO) – Sri Lanka’s central bank has stopped overnight auctions to withdraw excess liquidity from money markets until further notice, but will continue term auctions of securities to sterilize excess liquidity, officials said. Last month Sri Lanka also raised a billion dollars in international markets of which only about half was used for debt repayment.

Sri Lanka’s Treasury bill markets have yields below 7.25 percent, partly because foreign holders are willing to roll over bills at lower rates and because the central bank takes up bills at times, dealers said.

If central bank bill take-ups are subsequently sold at higher rates, or if the repo window is at a higher rate than auction rates at which bills are taken, central bank profits will be indirectly transferred to the budget, analysts said.

The Central Bank has a 7.25 percent repo window where banks and deposit excess reserves and a 9.0 percent reverse repo window through which money can be borrowed.

Banks can continue to deposit excess money in the overnight window at 7.25 percent an official said.

This will make overnight rates converge around 7.25 percent from rates around the 7.6 percent range seen in overnight call rates, dealers said.

However the Central Bank will continue term auctions to sterilize excess liquidity when the need arises, an official said.

Sri Lanka’s money markets have been flooded with excess liquidity mainly from foreign exchange interventions, since the signing of a deal with the International Monetary Fund in mid 2009.

Long term sterilization of excess liquidity through outright sales of domestic securities causes foreign reserves to increase.