Sri Lankan stocks tumble after opening higher, markets await rate decision

Sept 28, 2007 (LBO) – Sri Lankan stocks tumbled soon after opening with brokers saying investors were largely inactive, as markets awaited a money policy announcement later in the day. There was only 43 million rupees turnover on the Colombo bourse around mid-morning with the All Share Price Index down 4.91 points or 0.19 percent and trading limited to selected stocks,

Investors were more likely to prefer debt where gains are higher than playing the stock market, brokers said.

“Generally, it’s debt versus equity,” said Reshan Kurukulasuriya, Vice President, DFCC Stockbrokers.

“When debt instruments are moving up so much and the government borrowing at 18-19 percent it’s more attractive for investors to invest in the debt markets.”

There was no market moving news either with investors doubtful whether the Tamil Tigers would respond to the government’s call to resume peace talks after taking a beating at the hands of the military in recent months.

Sri Lanka’s financial markets were tight ahead of a monetary policy announcement to be released at 16.30 hours local time (1100 UTC) and inflation data at 15.00 hours (0930 UTC).

Call money peaked at 25 percent and Treasury repo’s were done at 23, dealers said.

Sri Lanka’s policy reverse repo rate, which is the rate the central bank prints money to clear liquidity shortages in the banking system, is 12.00 percent.

Economic analysts say it is out of line with the market and needs to be raised at least by 500 basis points to help clear extreme volatility and help stabilize the economy.

Due to flaws in Sri Lanka’s monetary law, the central bank is forced to print money to finance the budget deficit, which frequently causes inflation to rise and the rupee to fall.

However three month risk free rates are now at around 18.00 percent and the central bank has limited money printing in the last few weeks after inflation spiked to 17.3 percent and the rupee came under severe pressure.

On Friday rupee was firm against the greenback at 113.47/49 in the spot market.