Sri Lanka stops repo auctions to stabilize rates

Nov 28, 2011 (LBO) – Sri Lanka’s Central Bank will stop repo auctions which drained money at rates higher than a 7.00 percent standing facility and also allow banks to swap dollars for cash to stabilize money markets, an official said. “We are stopping the repo auctions,” Deputy Governor Dharma Dheerasinghe said.

The repo auctions moved the floor of Sri Lanka’s policy rate corridor from 7.00 percent to 7.57 percent last week.

Overnight rates have been volatile due to liquidity losses stemming from dollar sales by the Central Bank.

Though the interbank market has about 15 – 20 billion rupees in excess liquidity the cash is concentrated among foreign banks that do not have risk limits to lend to other market participants.

When the central bank takes in excess cash either through the standing facility or an auction and re-lends them to other market participants either though a standing facility or an auction, it acts as a central counterparty to clear the risk.

Overnight gilt backed repos moved close to the 8.50 percent ceiling policy rate of 8.45 percent Friday but were trading round 8.30 percent Monday, dealers said.

Rates are expected to ease further.

At meeting of primary dealers Friday a request was also made to allow banks who are temporarily short of cash to swap dollars with the central bank for rupees, instead of borrowing from the reverse repo window.

“We will swap dollars for cash. That will stabilize the markets. We are ready to do that from today,” Dheerasinghe said.

“Some banks are excess dollars.”

Sri Lanka’s forex and money markets have saw some uncertainty last week following a surprise devaluation to 113.90 from 110.20 levels announced in the budget, but has since begun to stabilize.

The rupee has come under pressure from high credit growth from mid 2011.

Central Bank governor Nivard Cabraal said interventions in forex markets have reduced and credit growth is expected to ease.