Monetary Policy Review – September 2015 - Policy rates unchanged

Headline inflation, on a year-on-year basis, remained in the negative territory at -0.2 per cent for the second consecutive month in August 2015. Headline inflation, on an annual average basis, moderated further to 1.0 per cent in August 2015 from 1.3 per cent in the previous month. Meanwhile, core inflation increased to 3.9 per cent in August 2015 on a year-on-year basis, from 3.5 per cent in the previous month. However, annual average core inflation remained unchanged since June 2015 recording 2.8 per cent in August 2015. Going forward, headline inflation is expected to remain comfortably within 2.0-3.0 per cent by year end, supported by improved domestic supply conditions and subdued global commodity prices. 

In the monetary sector, broad money (M2b) recorded a year-on-year growth of 16.2 per cent in July 2015, driven entirely by the expansion in domestic credit aggregates. While credit granted to the private sector by commercial banks increased by 21.0 per cent, on a year-on-year basis, in absolute terms, credit granted to the private sector in July 2015 was Rs. 40.9 billion totaling to Rs. 245.9 billion during the first seven months of 2015. The increased credit flows to the private sector have been sustained mainly due to prevailing low market interest rates amidst low inflation environment. Meanwhile, the Central Bank has observed with concern the recent rapid growth of exposure of banks and financial institutions to certain categories of lending, in particular lending in respect of motor vehicles. Accordingly, with a view to preempt this trend which could develop into a system-wide risk to the financial sector, as a prudential measure, the Central Bank decided to impose a maximum Loan to Value (LTV) ratio of 70 per cent in respect of loans and advances granted for the purpose of purchase or utilisation of motor vehicles by banks and financial institutions supervised by the Central Bank. Going forward, the Central Bank will continue to be vigilant on the overall trends in the growth of credit as well as monetary aggregates and take pre emptive measures in the case of emerging risks threatening the maintenance of price stability on a sustainable basis. 

On the external front, the decline in expenditure on imports in July 2015 has been greater than the decline in earnings from exports, narrowing the deficit in the trade account of the month. With the Central Bank’s decision to allow greater flexibility in the determination of the exchange rate, so far in 2015, the rupee has depreciated by around 7 per cent against the US dollar. The recent depreciation of the exchange rate, which would enhance exports, while curtailing non essential imports, is expected to have a favourable impact on the trade balance. Such improvement, together with regular inflows of workers’ remittances and earnings from tourism along with other inflows to the services account would help narrow the deficit in the current account balance and strengthen the resilience of the external sector. Meanwhile, the gross official reserves, which stood at US dollars 6.8 billion at end July 2015, are estimated to have decreased to US dollars 6.4 billion by end August 2015. However, official reserves are expected to increase during the remainder of the year with the expected long term external financial flows to the government. 

According to the Department of Census and Statistics (DCS), the Sri Lankan economy is estimated to have grown by 6.7 per cent during the second quarter of 2015, recording a growth rate of 5.6 per cent for the first half of 2015 compared to 1.3 per cent recorded in the corresponding period of 2014. Economic growth during the second quarter has been largely supported by the improved performance in the Services sector along with positive contributions from the Industry and Agriculture sectors. 

Taking the above developments in the economy into consideration, the Monetary Board, at its meeting held on 25 September 2015, was of the view that the current monetary policy stance is appropriate. Accordingly, the Monetary Board decided to maintain the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank unchanged at 6.00 per cent and 7.50 per cent, respectively.

Sri Lankan stocks little changed ahead of policy rate decision

Reuters: Sri Lankan shares ended little changed on Friday ahead of the central bank's policy rate decision later in the day where it is widely expected to keep its policy rates unchanged.

The main stock index closed near its more than two-month closing low hit on Monday, down 0.06 percent at 7,110.80.

"There seems to be some investor confidence coming into the market. But investors are waiting to see the direction," said Dimantha Mathew, a research manager at First Capital Equities (Pvt) Ltd.

"Going into October, the market will be positive with confidence improving. The rupee is also seen settling gradually."

The monetary policy rate announcement is scheduled at 1230 GMT.

A weak rupee curbed investor risk appetite and rising market interest rates also hit sentiment, with t-bill yields at their highest level in more than five months at the last auction.

Turnover was 1.12 billion rupees ($7.95 million), its highest since Aug. 27 and in line with the daily average of 1.11 billion rupees. The turnover has been roughly half of this year's daily average since Aug. 31, stock exchange data showed.

Analysts said investors were waiting to see how the government would bridge the budget deficit and where the revenue would come from, in its November budget.

The IMF last week said the fiscal deficit is likely to range between 5.5 percent and 6 percent in 2015, much higher than an official target of 4.4 percent due to falling government revenues.

Foreign investors were net buyers of 317.4 million rupees worth of shares on Friday, but they have been net sellers of 2.49 billion rupees so far this year.

Shares of Ceylon Tobacco Company Plc fell 0.88 percent, while Peoples Leasing Plc dropped 3.49 percent. ($1 = 140.9500 Sri Lankan rupees) 

(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Subhranshu Sahu)

Finance Houses and Leasing Companies to appeal to CB Relax vehicle leasing directive

By Ishara Gamage

Ceylon Finance Today: The Finance Houses Association of Sri Lanka and the Leasing Association of Sri Lanka have planned to request the Central Bank of Sri Lanka to relax its recently imposed vehicle loans and leases directive as it could restrict growth in their leasing and vehicle lending books, relevant Associations members told Ceylon FT yesterday."We are drafting separate letters to send the Governor of Central Bank by explaining our grievances and suggestions", they said. They believe that except vans and luxury vehicles all other vehicles could be omitted from this directive."Re-registered vehicles, two wheelers, three wheelers and commercial vehicles can be easily omitted from this directive; they have minimum effects for foreign currency outflows, an official of the Finance Houses Association," added. He also emphasized that limiting commercial vehicles such as agricultural vehicles, SME vehicles and buses could adversely affect the country's economic activities.

Leasing is the core business of the Sri Lanka's finance companies and it account for nearly 75% of its business. Leasing is represented around 5-10% of the banking sector business.In an offer to scale down vehicle imports weighing on the country's Balance of Payment (BOP) the Central Bank sent directives to all banks and finance companies imposing restrictions on loans and leases to vehicles.According to the condition, all banks and finance companies are now only allowed to provide a lease of up to 70% of the vehicle value.The directive came into effect from midnight of September 14.Meanwhile, JB Securities releasing its August vehicle registration review said," Contrary to popular belief balance of payment crises that this country faces from time to time are not due to vehicle imports but due to a combination of monetary policy (not allowing a free floating exchange rate and/or not revising interest rates) and fiscal policy (public servant salary increases, not collecting enough taxes, under recovery of petroleum taxes, etc.). Thus the solution to the BOP crisis is to address the fundamental issues rather than meddle with vehicle taxes.

Brand new car registrations were 4,990 units in August lower than 5,773 units recorded in July but significantly higher than 788 units recorded 12 months ago. Small cars (<1,000 cc) accounted for 94% share of brand new registrations. Maruti's accounted for 4,075 units down from 5,024 units recorded in July but significantly higher than 380 units recorded 12 months ago. Maruti financing share was 61.2% lower than 68.4% recorded in July which may explain the slow down. Micro Panda accounted for 402 units up from 238 units in July.