By Paneetha Ameresekere
Ceylon Finance Today: The Central Bank of Sri Lanka (CBSL) allowing interest rates to rise in order to stave off pressure on the rupee from depreciating is not enough to take the flak off the local currency, market sources told Ceylon FT.
In tandem with allowing rates to rise, it also should allow the rupee to depreciate, so as to ease pressure on the local currency which is being artificially propped up, they said.
This has to be looked at in the context that all major currencies have depreciated against the US dollar since Christmas 2014, sources said.
For instance the common currency euro, which on Christmas Eve was trading at US$ 1.25 to the euro has since fallen by 16% to US$ 1.05. Similarly, the Singapore dollar which was trading at US$ 1.29 to the US dollar has further declined to US$ 1.38, a seven per cent depreciation and the Japanese Yen from 105 yen to one US dollar to 120 yen currently, a fall of 14.3%.
Sources however justified government borrowings amounting to over Rs 100 billion made from the Treasury (T) bill and T bond market this week alone, saying those are borrowings made at a relatively cheaper rate to pay off a Rs 77 billion maturing six year T bond, borrowed at a higher weighted average yield (interest rate) of 16% which realizes on Sunday 15 March.
Those funds were raised by issuing T bonds and T bills to the market of tenures as short as three months to as long as 30 years.
"Now a yield curve for the T bill and T bond market is also being developed," they said.
"Under the previous regime, prior to such T bill and T bond auctions being held, CBSL used to tell us what the bid prices should be," the sources said. Now however there is no such administered regulation of interest rates. The market is allowed to 'rate discover' interest rates on their own, the sources said.
This is also one key measure to take the heat off the exchange rate, they said.
But, as aforesaid, that alone is insufficient, sources said.
Meanwhile, other sources said that under the previous regime, the yield curve was flat. But now, in reality, such a curve is developing.
CBSL Governor Arjuna Mahendran speaking at a seminar organized by Fitch recently said that the T bond market needs to develop a yield curve. "That way issuers in particular will be guided how to price their bonds," he said.
Dr. Koshi Mathai, IMF's previous Resident Representative to Sri Lanka, told reporters that bank borrowings were virtually unheard of, especially in mature markets, in the case of long-term borrowings. "Issuers go to the bond market to raise the required funds in such instances and not from banks," he said.
Also, in respect of such bank borrowings, there is a mismatch in the tenures, Mathai said. One borrows "short" (bank borrowings are generally of shorter tenures) for long-term projects, he said.
Meanwhile, Mahendran speaking at that seminar also said that a casino operator had wanted CBSL to increase the single borrower limit. "I told this operator to instead go to the bond market to raise the required funds," he said.
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In tandem with allowing rates to rise, it also should allow the rupee to depreciate, so as to ease pressure on the local currency which is being artificially propped up, they said.
This has to be looked at in the context that all major currencies have depreciated against the US dollar since Christmas 2014, sources said.
For instance the common currency euro, which on Christmas Eve was trading at US$ 1.25 to the euro has since fallen by 16% to US$ 1.05. Similarly, the Singapore dollar which was trading at US$ 1.29 to the US dollar has further declined to US$ 1.38, a seven per cent depreciation and the Japanese Yen from 105 yen to one US dollar to 120 yen currently, a fall of 14.3%.
Sources however justified government borrowings amounting to over Rs 100 billion made from the Treasury (T) bill and T bond market this week alone, saying those are borrowings made at a relatively cheaper rate to pay off a Rs 77 billion maturing six year T bond, borrowed at a higher weighted average yield (interest rate) of 16% which realizes on Sunday 15 March.
Those funds were raised by issuing T bonds and T bills to the market of tenures as short as three months to as long as 30 years.
"Now a yield curve for the T bill and T bond market is also being developed," they said.
"Under the previous regime, prior to such T bill and T bond auctions being held, CBSL used to tell us what the bid prices should be," the sources said. Now however there is no such administered regulation of interest rates. The market is allowed to 'rate discover' interest rates on their own, the sources said.
This is also one key measure to take the heat off the exchange rate, they said.
But, as aforesaid, that alone is insufficient, sources said.
Meanwhile, other sources said that under the previous regime, the yield curve was flat. But now, in reality, such a curve is developing.
CBSL Governor Arjuna Mahendran speaking at a seminar organized by Fitch recently said that the T bond market needs to develop a yield curve. "That way issuers in particular will be guided how to price their bonds," he said.
Dr. Koshi Mathai, IMF's previous Resident Representative to Sri Lanka, told reporters that bank borrowings were virtually unheard of, especially in mature markets, in the case of long-term borrowings. "Issuers go to the bond market to raise the required funds in such instances and not from banks," he said.
Also, in respect of such bank borrowings, there is a mismatch in the tenures, Mathai said. One borrows "short" (bank borrowings are generally of shorter tenures) for long-term projects, he said.
Meanwhile, Mahendran speaking at that seminar also said that a casino operator had wanted CBSL to increase the single borrower limit. "I told this operator to instead go to the bond market to raise the required funds," he said.
www.ceylontoday,lk
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