July 02, 2013 (LBO) – Sri Lanka’s money markets were flooded with 35 billion rupees in excess cash after a cut in the statutory reserve ratio despite pre-emptive moves by the Central Bank to kill some liquidity. “But often liquidity is generated when the Central Bank buys dollar especially capital inflows to the government,” says fuss-budget.
“Unless the central bank is prepared to sell some or all of the purchased dollars when the cash is converted to credit and import demand is generated, the rupee will depreciate, inflation will go up and reserve money will expand, eventually absorbing that liquidity.
“It is unfortunate that if through a ‘flexible rupee’ policy the currency depreciates despite net sell downs of Treasuries due to the unsterilized purchase of capital inflows by the Central Bank.
“That is why is it necessary to have an operating policy of allowing the rupee to fall sharply only after liquidity runs out.”
Central Bank data showed that by June 26, Treasury bills held by foreigners rose to 76.0 billion from 74.0 billion a week earlier, but bond holdings fell to 418.6 billion rupees from 424.7 billion a week earlier.
The spot US dollar closed at 130.60/70 rupee levels Monday