Sri Lanka rupee gains, excess liquidity drops

Nov 12, 2007 (LBO) – The Sri Lanka rupee strengthened to 110.32/35 in spot trade Monday recovering losses made last week dealers said, while the central bank was progressively reducing excess liquidity. In equity markets, the benchmark Colombo All Share Index closed up 0.46 percent at 2,631.43 and the Milanka Index of liquid stocks ended up 0.17 percent at 3,521.71.

Turnover was 186.7 million rupees.

Updated

The central bank intervened after the rupee weakened to 110.45/50 levels Friday. But dealers say today’s trading seems market driven.

The central bank has also brought down excess liquidity in the market from 30 billion rupees to less than 10 billion over the last two weeks by selling down its treasury bills portfolio.

On Friday the bank sold down 3.1 billion rupees worth of bills.

The excess liquidity was brought on by the government repaying overdrafts of state banks with the proceeds of a 500 million dollar bond issue.

The bank acquired a massive Treasury bill portfolio of around 80 billion rupees by early October as it was called upon to print money to finance the budget deficit.

This drove inflation to 19.6 percent by October and the national currency slid against the dollar.

The central bank worsened the fall by engaging in sterilized intervention but eased up on the rupee on August 24, allowing the currency to stabilize.

But non-sterilized intervention, where the central bank sells dollars but do not add liquidity counteract its effect does not undermine the currency.

However after ending intervention, the central bank then held the rupee at 113.50 levels and prevented its appreciation, as it tried to recover foreign reserves lost to sterilized intervention as well as state appropriations.

The rupee was allowed to appreciate only after the proceeds of the 500 million dollar bond issue came in.

But the conversion of the bond caused the liquidity shock to the system, which the central bank seems to be struggling to sterilize even now.

In regional markets, the Indian rupee fell against the greenback.