July 15, 2009 (LBO) – Sri Lanka’s interbank excess liquidity rocketed by more than 20 billion rupees this week, with fresh injections of central bank credit to the system in the manner of a quantity easing exercise. Excess liquidity in the banking system increased from 5.4 billion rupees Friday to 26.3 billion rupees Monday, but the Central Bank’s t-bill stock stayed virtually static at 178 billion rupees, indicating that the cash was from central bank credit to state.
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On Tuesday excess liquidity increased to 28.7 billion rupees, with the monetary authority’s bill stock falling slightly to 176 billion rupees. Falling bill stocks generally point to externally generated liquidity being automatically sterilized overnight.
But the demand for circulating money within the country also influences interbank liquidity on a day-to-day basis, which analysts say makes it difficult to estimate the exact volume of central bank credit that has been injected to the market.
Domestically generated liquidity can raise inflation if allowed to remain in the system for a long time, and the central bank has been quick to mop up even externally generated liquidity since April.
Credit Growth
While mopping up