Sri Lanka Treasuries edge up above repo rate

Oct 28, 2010 (LBO) – Sri Lanka’s 6 and 12 month Treasuries yields edged up above the policy ‘repo’ rate at which excess reserves in banks are deposited at the Central Bank, at this week’s auction official data show. The 12-month bill yield rose 15 basis points to 7.37 percent moving higher than the 7.25 percent ‘repo’ policy rate, the 6-month yield rose 16 basis points to 7.25 percent.

The 3-month yield rose 11 basis points to 7.13 percent, but is still below the repo rate of 7.25 percent.

The government’s debt office, which is a unit of the central bank said 2.7 billion rupees of 3-month bills, 4.0 billion rupees of 6-month bills and 3.7 billion rupees of 12-month bills were sold.

Out of 12.0 billion rupees of maturing bills, 10.3 billion was sold to bidders. The statement did not say whether the central bank took up rest or it was retired.

With the 12 and 6 month rates moving above the repo rate, the market has started to respond to central bank rate signals.

Excess reserves in the banking system rose to a record 80 billion rupees yesterday, mostly with external liquidity, traders said.

Earlier in the year concerns had been raised about money being injected through quantity easing, but the T-bill stock of the Central Bank which is a proxy for money printed for deficit finance.

But yesterday the monetary authority’s Treasury bill stock fell to around billion rupees, indicating that source of liquidity was external.

Sri Lanka has a peg with the US dollar and interventions in forex markets also floods the system with money making it difficult to target rates via a policy rate.

Such monetary regimes are vulnerable to balance of payments crises and high inflation as policies required to control interest rates conflict with those required to target the exchange rate.

The central bank is moving gradually to directly targeting rates. Last week the monetary authority stopped overnight repo auctions which were at levels higher than the repo rate,