By Paneetha Ameresekere
As a result, CBSL on a net basis has expended US$ 315.80 million from its foreign currency reserves in the three months to November to protect the rupee, data showed.
"In this backdrop, Government of Sri Lanka (GoSL)/CBSL should reimpose high import taxes and high interest rates in order to mitigate pressure on CBSL's reserves from an economic perspective," they said. But, on the other hand, GoSL has reduced import taxes, decreased administered prices and hiked salaries in recent times, thereby causing imports to increase, the sources said.
"This is causing pressure on the rupee to depreciate, while at the same time due to CBSL's protection of the rupee, that is also causing a strain on CBSL's reserves," they said. But, considering recent political developments, CBSL will keep its key policy rates unchanged for a record 11 months when it releases the current month's monetary policy review on Friday (12 December), sources said.
CBSL's standing deposit facility (SDF) and standing lending facility (SLF) are at 6.5% and 6.80% currently.
Excess liquidity recorded yesterday was Rs 29,155 million.
"If it cut its rates due to a surfeit of excess liquidity, savers will then complain that it would be a further blow by inducing deposit rates to come down further, thereby impinging on their livelihoods because they are dependent on interest income for a living," sources said.
"On the other hand, if it raises rates in order to protect its foreign reserves, consumers will complain because borrowings have become more expensive," they said. Meanwhile, private sector credit growth has fallen to an abysmally low 4.6% on a year-on-year basis as at September, according to latest data, compared to a record 34.5% growth in recent times, that is, in December 2011.
Therefore, an increase in rates may fuel the possibility that it will further impinge on private sector credit growth, they said. Therefore, rates remain unchanged on Friday, they added.
Meanwhile, despite moral suasion, the exchange rate closed weaker by 10 cents to Rs 131.95 to the US dollar in interbank spot next next trading yesterday due to Bank of Ceylon and People's Bank buying dollars from the market in order to settle Petroleum Corporation's petroleum bills, sources said.
In the Treasuries market, the more liquid 2022 maturity closed unchanged at 8.30-40% levels yesterday, after seeing its yields increase by 30 basis points since October after CBSL reversed a decision when issuing its September monetary policy statement on 23 September, 2014 that it will suspend its repo purchases till further notice in order to keep its policy rates at a low five per cent, only to re-start repo auctions in under two weeks in early October to boost rates in order to win the support of savers.
Yesterday's repo auction fetched a yield of 5.99%, 99 bps more than its SDF rate of five per cent for all practical purposes, due to its 23 September ruling which said that banks which park their excess for more than three days in CBSL's SDF window, will be paid a low five per cent interest rate, compared to the standard SDF rate of 6.5%.
Sources also said that the more liquid 2019 maturity closed unchanged at the 7.35-45% levels yesterday, after seeing its rates also increase sharply after 23 September decision of CBSL's being reversed. Sources said that this state of affairs, especially in regard to the exchange rate will continue till polls day, 8 January, 2015.
www.ceylontoday.lk
Ceylon Finance Today: Markets are in a peculiar position of having a surfeit of excess liquidity due to foreign borrowings by the State and its agents, while the country's foreign reserves are under pressure due to Central Bank of Sri Lanka's (CBSL's) continuous protection of the rupee, market sources told Ceylon FT.
As a result, CBSL on a net basis has expended US$ 315.80 million from its foreign currency reserves in the three months to November to protect the rupee, data showed.
"In this backdrop, Government of Sri Lanka (GoSL)/CBSL should reimpose high import taxes and high interest rates in order to mitigate pressure on CBSL's reserves from an economic perspective," they said. But, on the other hand, GoSL has reduced import taxes, decreased administered prices and hiked salaries in recent times, thereby causing imports to increase, the sources said.
"This is causing pressure on the rupee to depreciate, while at the same time due to CBSL's protection of the rupee, that is also causing a strain on CBSL's reserves," they said. But, considering recent political developments, CBSL will keep its key policy rates unchanged for a record 11 months when it releases the current month's monetary policy review on Friday (12 December), sources said.
CBSL's standing deposit facility (SDF) and standing lending facility (SLF) are at 6.5% and 6.80% currently.
Excess liquidity recorded yesterday was Rs 29,155 million.
"If it cut its rates due to a surfeit of excess liquidity, savers will then complain that it would be a further blow by inducing deposit rates to come down further, thereby impinging on their livelihoods because they are dependent on interest income for a living," sources said.
"On the other hand, if it raises rates in order to protect its foreign reserves, consumers will complain because borrowings have become more expensive," they said. Meanwhile, private sector credit growth has fallen to an abysmally low 4.6% on a year-on-year basis as at September, according to latest data, compared to a record 34.5% growth in recent times, that is, in December 2011.
Therefore, an increase in rates may fuel the possibility that it will further impinge on private sector credit growth, they said. Therefore, rates remain unchanged on Friday, they added.
Meanwhile, despite moral suasion, the exchange rate closed weaker by 10 cents to Rs 131.95 to the US dollar in interbank spot next next trading yesterday due to Bank of Ceylon and People's Bank buying dollars from the market in order to settle Petroleum Corporation's petroleum bills, sources said.
In the Treasuries market, the more liquid 2022 maturity closed unchanged at 8.30-40% levels yesterday, after seeing its yields increase by 30 basis points since October after CBSL reversed a decision when issuing its September monetary policy statement on 23 September, 2014 that it will suspend its repo purchases till further notice in order to keep its policy rates at a low five per cent, only to re-start repo auctions in under two weeks in early October to boost rates in order to win the support of savers.
Yesterday's repo auction fetched a yield of 5.99%, 99 bps more than its SDF rate of five per cent for all practical purposes, due to its 23 September ruling which said that banks which park their excess for more than three days in CBSL's SDF window, will be paid a low five per cent interest rate, compared to the standard SDF rate of 6.5%.
Sources also said that the more liquid 2019 maturity closed unchanged at the 7.35-45% levels yesterday, after seeing its rates also increase sharply after 23 September decision of CBSL's being reversed. Sources said that this state of affairs, especially in regard to the exchange rate will continue till polls day, 8 January, 2015.
www.ceylontoday.lk
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