Sri Lanka cuts reserve ratio to 7.75-pct

Nov 25, 2008 (LBO) – Sri Lanka has cut its statutory reserve ratio for commercial banks from 9.25 percent to 7.75 percent, releasing 17 billion rupees in cash to the banking system, the central bank said. The statutory reserve ratio (SRR) cut will release 17 billion rupees to the banking system when it becomes effective on November 28, the Central Bank said.

A lower reserve ratio increases the ability of banks to lend money, by reducing the deposits it must keep with the Central Bank and reduces costs.

“It is also expected that by addressing the liquidity shortfall in the market, the cost of funds of the private sector would decrease and that would facilitate the smooth functioning of economic activities,” the Central Bank said.

But economic analysts warn that by boosting lending, the reserve ratio cut can put new pressure on forex markets as well as creating new foreign exchange pressure.

“It should also be noted that since inflation is already on a decelerating trend at a faster rate than expected, this measure is not expected to pose any threat to the inflation outlook,” the Central Bank said.

Sri Lanka has been importing ‘deflation’ through its dollar peg amidst a collapsing