Sri Lanka to mop up liquidity surge to temper forex effects

June 26, 2013 (LBO) – Sri Lanka will mop up a surge of liquidity from a 200 basis point reserve ratio cut to temper any pressure on the exchange rate, Central Bank Governor Nivard Cabraal said. The speed at which liquidity hits the forex markets depends on the degree of openness of the economy and the rate of credit expansion.

A central bank can strengthen an exchange rate either through interventions in the forex markets, which are not followed up by liquidity injections (unsterilized interventions), or through liquidity withdrawals from the interbank money markets.

The rupee was quoted around 128.85/129.00 rupees to the US dollar in the interbank market.

Sri Lanka’s he statutory reserve ratio, or the share of cash from deposits that banks have to place with the Central Bank was cut to 6.0 percent Wednesday which could release about 35 to 40 billion rupees in liquidity to the interbank market.

The liquidity when loaned out can eventually generate import demand of about 300 million US dollars, which will not be matched by any inflows, potentially putting downward pressure on the rupee dollar exchange rate.

Governor Cabraal said open market operations will be cond