Sri Lanka interbank rates touch 40%

Sri Dharanee Performance Arts Theatre

August 21, 2007 (LBO) – Sri Lanka’s interbank rates touched 40 percent in early trade Tuesday after the market ran out of liquidity amidst pressure on the currency, dealers said. However a fresh inflow of foreign capital can reduce pressure.

The overnight call rate, where banks borrow from each other without collateral in the interbank market, moved to 40 percent with collateralized repurchase transactions moving to 37 percent.

The market is short of liquidity amid intervention in the forex market by the Central Bank.

The spot dollar with settlements two market days ahead was offered at 112.05 rupees with bids at the same rate Tuesday.

The gap between cash transactions more than doubled to about 5 ticks compared to the day before with overnight rates moving up.

Overnight rates peaked at 20 percent Monday.

Economic analysts have said the Central Bank’s attempts to ‘fix’ the dollar/rupee rate while trying to keep base money stable was increasing pressure on the currency.

Central Bank’s holdings of treasury bills had risen to 65 billion rupees from about half that level three months ago.

While such practices, a feature of pegged exchange rates, can operate while there is a net balance of payments surplus, economists point out that it can eventually create a currency crisis when net flows reverse, unless the exchange rate is allowed to adjust.

Many pegged exchange collapses have been blamed on this practice, which is known as sterilized intervention.