Sri Lanka rupee tests new lows against greenback; cash rates stabilize

August 23, 2007 (LBO) – The Sri Lanka rupee tested new lows against the greenback Thursday while overnight cash rates moderated after the monetary authority relaxed access to its discount window. In mid-day trade the spot dollar changed hands around 112.25 rupees with offers at 112.30 levels, dealers said.

Official intervention was seen in the market in earlier in the at 112.18 levels.

Overnight call rates stabilized around 19 percent to 20 percent from highs of over 40 percent a day before with primary dealers allowed discount window cash and a six-days-a-month access limit for banks was also removed.

The central bank cut the dealers off the window and tightened access for commercial banks to borrow from the window to prevent market participants from using the discount window, analysts said.

Discount window cash represents printed money which not expected to be used for asset purchases but only to meet liquidity shortfalls, they say.

Primary dealers have complained that without the comfort of the window they were unable to quote bid and offer prices for government securities which ultimately brought secondary trading in bonds to a standstill.

The monetary authority is selectively giving cash to dealers.

However an anomaly in the rate structure with the window cash coming at 12.00 percent against market rates of 20.00 percent is presenting an irresistible arbitrage opportunity for market participants.

Analysts say the policy rate structure needs to be regularized to remove arbitrage opportunities. .