Sri Lanka’s cash rates rocket to a new 7-year high amidst cash crunch

March 09 (LBO) – Sri Lanka’s overnight rates reached 30 percent amidst tight liquidity, with monetary authorities restricting access to its discount window, dealers said. The central banks key discount rate was raised by 50 basis points to 12.00 per in February after inflation rose to 20.5 percent in January.

Updated – highest call rate In January Central Bank limited commercial bank’s access to its discount window to six times a month and said it would not conduct open market auctions for cash injections unless the entire banking system was short of cash on a net basis.

On Thursday call rates hit 22 percent with the market short by about 3.3 billion rupees.

Central Bank treasury bill stocks had also climbed to 55 billion rupees from 49 billion, injecting about 6 billion in cash to the market from a week earlier.

Analysts say the market could be short due to a forex outflow.

On January 24, call rates hit 23.5 percent. In late 2000 rates hit 32 percent amidst a balance of payments troubles.

The Sri Lanka rupee traded at around 109.10 Friday.

Though the rupee has depreciated by about 6.5 percent, some analysts believe that it is still overvalued, driving the country’s export growth below double digits last year.

Sri Lanka’s cash markets have been volatile since the central bank started mixing administrative controls to tighten monetary policy, instead of relying purely on policy rates.

Analysts say that interest rates are likely to be volatile until the central bank returns to rate targeting as the sole means of signaling the market.

Rate targeting is practiced in developed markets with efficient banking systems, and Sri Lanka has had good results using rates as the primary tool earlier.

But policy rates have been lagging even market rates short term rates in recent month and some analysts believe that monetary authority may be using relatively blunt administrative controls and putting up with volatile rates to make up for shortfalls in policy rates.