More Liquidity

Oct 13, 2008 (LBO) – Sri Lanka’s central bank has cut the reserve requirement of commercial banks from 10 percent to 9.25 percent, and further relaxed access to the discount window. “This step has been taken in order to inject more liquidity to the domestic financial market so as to enable the market to effectively face any liquidity constraint that may arise as a result of the on-going turbulence in the global financial markets,” the central bank said in a statement.

The cut in the reserve requirement would become effective from October 17, and would release about 7.5 billion rupees to the market, the monetary authority said.

However, the central bank would further tighten its reserve money target for the fourth quarter of 2008, to neutralize the effect.

High statutory reserve ratios increase the costs of commercial banks by unnecessarily tying up money in the central bank.

Most advanced central banks in the world have cut reserve ratios to very low single digits to make the banking system more efficient and create a level playing field between commercial banks and other financial players.

Last week India cut its reserve ratio to 7.5 percent from 9.0 perc