Sri Lanka to resume cash auctions in money markets: CB Governor

Sept 15, 2011 (LBO) – Sri Lanka’s central bank is ready to start daily cash auctions in money markets Governor Nivard Cabraal said, as dollar sales to maintain a currency peg rapidly sucked rupees out of the banking system. “If liquidity is low and we do not have excess liquidity, we will resume daily auctions,” Cabraal said.

“We have had nine months of excess liquidity.”

On Wednesday excess liquidity fell to 23.1 billion rupees amid steady foreign exchange sales to maintain a peg around 110 rupees to the dollar. Excess liquidity is down from a high of 77.9 billion rupees reached on July 28 after the central bank bought dollars from a sovereign bond.

The daily open market auctions are coming after an absence of over two years.

Since a balance of payments crisis ended in April 2009 with a float of the rupee, Sri Lanka’s open market operations have focused on draining liquidity out of the money markets amid weak credit growth and there was no need to inject fresh cash.

For most of the past year interest rates had tended to hover around the ‘repo’ window of 7.0 percent as banks deposited excess reserves in the monetary authority.

But in 2011 credit growth has picked up. Amid recent dollar sales which drained liquidity interest rates have started to move up towards the ‘reverse repo’ window rate of 8.50 percent, which had also lain dormant for over two years.

Daily auctions allow banks to borrow below the reverse repo window rate. The window will also be made available to banks.

“We will be having all the (liquidity) facilities,” Cabraal said.

To maintain interest rates the effects of dollar interventions in the forex market have to be sterilized by injecting cash to money markets.

In July the central bank sold 416 million dollars to defend its soft peg with the US anchor currency and the International Monetary Fund warned against further interventions.

Analysts have said that Sri Lanka will either have to raise rates or allow the currency to weaken to prevent foreign reserve losses.

But Governor Cabraal said the interventions would be temporary and foreign inflows were expected from private investments, government inflows and international bank capital raisings.

Excess liquidity went to record highs of over 100 billion rupees late last year after the Central Bank stopped permanently sterilizing dollar inflows after running down its portfolio of 270 billion rupees of Treasuries acquired during the 2008-2009 balance of payment crisis.

The latest data shows that its Treasuries stock has risen to 28.1 billion rupees, which is indicative of money injected outside the two main facilities.

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