Money Money

Central Bank has started issuing Central Bank securities to check reserve money growth, as its own supplies of treasury bills dwindle away.
ldblquote We started issuing Central Bank Securities this week,
dblquote says Deputy Governor W A Wijewardene.rn

rnThe Bank issued about Rs. 2.5 bn worth of Central Bank (CB) securities mainly to EPF endash the first time it had done so since 1998.rn

rnBut large-scale CB securities issues were last seen in 1993, when booming equity markets brought in large capital inflows.rn

rnCentral Bank has been buying dollars steadily for nearly two years to boost its reserves, and paying for it with rupees – essentially printing money to buy dollars.rn

rnTo keep money supply from growing too fast, Central Bank has been steadily selling its substantial holdings of treasury bills, a legacy from the balance of payments crises days, when Central Bank bought large quantities of treasury bills to pump liquidity to the market as fleeing dollars sucked away rupees from the economy.rn

rnBut now almost all of this T-bill has been sold. rn

rnSo it has to issue Central Bank securities to sterilize the rupees generated from buying dollars, to check above target growth of reserve money, which is believed to increase inflationary pressures on the economy.rn

rnThe move came even as the Ceylon Chamber of Commerce called for stronger Central Bank intervention to prevent rupee appreciation, using lquote sterilized intervention.

rnNext Monday when the government receives the US$ 100 mn NEXI loan, Central Bank will buy the dollars and add it to its reserves, as it does not want to have the rupee shooting up.rn

rnThis will inject about Rs. 9 bn to the money supply, and has the potential to increase the current excess liquidity in the markets from the Rs. 12 bn to Rs. 14 bn levels to Rs. 20 bn to Rs. 22 bn levels.rn

rnThe government is planning to retire about Rs. 7 bn worth of treasury bills with the money.rn

rnldblquote But about six billion of this is held by the Central Bank, so the money will not come to the market,
dblquote points out Wijewardene.rn

rnWith another Rs. 2.5 bn already sterilised ahead of the Nexi money, the net impact on reserve money should be almost neutral.rn


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