Nov 24, 2008 (LBO) – Sri Lanka’s central bank has printed and injected money up to nine months at rates lower than its penal discount window to sterilize interventions in the forex market, the latest data showed.
The rupee traded at 110 rupees to the greenback amid interventions and overnight money rates were around 19.0 percent, dealers said.
The Central Bank’s Treasury bill stock acquired with printed money rose to 109.9 billion rupees on Friday from around 100 billion rupees earlier in the week, indicating a continuing drain of foreign reserves.
The Central Bank has also released about 7.5 billion rupees through a reserve ratio cut raising total injections to 117 billion rupees (1070 million US dollars).
The country’s monetary base has also contracted by about 10 billion rupees (91 million US dollars) from the time the balance of payments problem began in early September.
On Friday the monetary authority bought 4.9 billion rupees of treasury bills from the market participants at rates between 17.60 percent and 18.37 percent, injecting money for periods ranging from January to August 2009.
The yields were around 100 basis points lower than the market for some maturities, giving ample opportunities for bill holders to exit at a profit, dealers said.
Analysts warn that such buy-backs undermine the Central Bank’s penal discount window which prints money at 19.00 percent.
The central bank also has a 12.00 percent discount window with limited access.
Analysts have warned that the cycle of currency defence and liquidity injections would only increase pressure on the forex market and worsen the on-going balance of payments crisis.
Such ‘sterilized interventions’ have been a recipe for currency collapse in other countries.