Sri Lanka starts active open market operations – Update

Sept 19, 2011 (LBO) – Sri Lanka’s central bank resumed active open market operations Monday absorbing a small amount of excess liquidity eight basis points above it 7.0 percent policy rate, rejecting most of the bids that came at higher rates, dealers said. Market participants offered to sell 36.15 billion in excess rupees through the window in an auction to take back 39 billion rupees, which were earlier parked in a 7.0 percent passive liquidity facility.

“There is excess liquidity in the market and we will absorb it,” director economic research K D Ranasinghe said.

The central bank only accepted only 129 million rupees in bids for 7.08 percent, rejecting all other bids, dealers said.

Excess banks can bid at rates between 7.00 percent and 8.50 percent but dealers do not expect major movements in repo rates in the first auction. Banks whose bids are rejected will have to park cash at the window at 7.0 percent.

Analysts have warned that Sri Lanka has to allow rates to move up to prevent pressure on the exchange rate.

The auctions signal the resumption of active open market operations by the central bank and moving away from the passive use of the standard facilities of fixed rate windows. Excess liquidity which rose to 77.9 billion rupees in On July 28 when the Central Bank bought proceeds of a sovereign bond has rapidly disappeared amid non-sterilized interventions in forex markets.

The auctions can also be used to inject liquidity if needed. Sri Lanka last used reverse repo auctions to inject liquidity in 2009 and repo auctions in 2010.

Dealers say state banks and some larger foreign banks have excess liquidity while smaller banks and at a handful of larger domestic private banks are short of cash.

Meanwhile the central bank’s Treasury bill stock, which can also represent cash injections to the economy through direct purchases Treasuries or reserve appropriations by the state, has also moved up to 37.2 billion rupees Friday.