Dec 16, 2011 (LBO) – Sri Lanka’s overnight money rates spiked Friday amid liquidity shortages from peg defence and seasonal demand, prompting a 10 billion rupee cash auction by monetary authorities, dealers said. Overnight gilt backed repos rose as much as 8.35 percent and eased to 7.75/8.00 percent levels after a cash injection through a reverse repo auction was announced, up from an average of 7.75 percent and peak of 7.90 percent Thursday.
The central bank’s standing facility to inject liquidity (reverse repo window) is at 8.50 percent.
Call money rose as high as 9.25 percent before easing to 8.75/9.00 percent, up from a peak of 8.80 percent and an average of 8.44 percent on Thursday.
On Thursday excess liquidity in the banking system dropped to 16.6 billion rupees, from 22 billion rupees a day earlier.
Because excess reserves are concentrated among a few foreign banks which do not have risk limits to lend to other market participants rates go up and the Central Bank has to step in as a central counterparty.
Sri Lanka’s interbank market is seeing liquidity shortages due to forex sales by the money authority to defend a dollar peg at 113.90 rupees in the spot market. On Friday the spot dollar was quoted at 113.90/choice, dealers said.
The forex market interventions which such liquidity out of the system have to be sterilized with liquidity injections via domestic asset (Treasuries) purchases.
In December however there is also a seasonal cash demand of about 10 billion rupees or more due to an increase in the money-in-circulation component of reserve money. Since active sterilized interventions began two months ago the Central Bank’s Treasuries portfolio has risen to 141 billion rupees from below a billion rupees, which is indicative of an broadly similar loss in foreign assets.
The liquidity injections create more pressure on the currency peg, analysts have warned.
The Indian rupee has also come under pressure from sterilized interventions, and the finance ministry has urged the Reserve Bank of India to halt interventions.
In debt markets a bond maturing in 2015 was quoted around 9.95/10.10 percent levels and a 2014 bond rose to 9.98/10.05 percent levels from 9.80/90 percent levels a day earlier, dealers said.