ECONOMYNEXT – Sri Lanka’s rupee closed weaker at 304.75/305.40 to the US dollar Tuesday, down from 304.15 to the US dollar Friday, dealer said, while some bond yields edged up.
Sri Lanka’s rupee has weakened amid unsterilized excess liquidity from earlier dollar purchases.
Excess liquidity fell from as high as 200 billion rupees, helped by some sales of maturing bills and also allowing some term contracts to run out.
However the central bank has started to inject liquidity again below its policy rate to suppress interest rates.
On Tuesday 30 billion rupees was printed overnight at an average yield of only 8.73 percent.
Separately another 25 billion rupees was printed till June 25 at 8.09 percent to 9.05 percent, which was still below overnight the policy rate of 9.5 percent.
Nobody has so far taken the central bank to court for printing money beyond overnight at rates lower than the overnight rate.
Sri Lanka operates an ad hoc exchange rate regime called ‘flexible exchange rate’ which triggers panic among market participants, as the central bank stays away when spikes in credit either creates import demand or unsterilized credit is used up.
“If large volumes of unsterilized liquidity is left, the exchange rate has to be closely defended to prevent speculation involving early covering of import bills and late selling of exports proceeds,” EN’s economic columnist Bellwether says.
“Just as an appreciating or stable exchange rate leads to late covering of import bills, a falling rates leads to immediate covering of import bills.
“Keeping exchange rates stable is a relatively simple exercise but it is difficult to do so if short term rates are also closely targeted with printed money, as liquidity runs out, as if the country had a free float and no reserve target.”
“When there is a large volume of excess liquidity remaining (except those voluntary deposited for long periods by risk averse banks) the the interest rates structure is under-stated compared to the reported reserves.
“Interest rates would be a little higher than seen in the market if the liquidity was mopped up and domestic credit and imports were blocked to prevent the reserves from being used up.”
In East Asia there is greater knowledge of central bank operational frameworks, though International Monetary Fund driven flawed doctrine are also threatening the monetary stability of those countries, critics say.
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Sri Lanka’s rupee started to collapse steeply after the IMF’s Second Amendment in 1978 along with many other countries as flawed operational frameworks gained ground without a credible anchor.
A bond maturing on 15.12.2026 closed at 10.10/30 percent up from 10.05/30 percent Friday.
A bond maturing on 15.10.2027 closed at 10.60/57 flat from 10.60/80 percent.
A bond maturing on 01.07.2028 closed at 11.15/35 percent, up from 11.05/20 percent.
A bond maturing on 15.09.2029 closed at 11.80/90 percent unchanged.
A bond maturing on 15.10.2030 closed at 11.90/12.00 percent.
A maturing on 10.12.2031 closed at 11.95/12.10 percent.
A bond maturing on 01.10.2032 closed at down at 11.95/12.10 percent, down from 12.00/10 percent. (Colombo/Jun14/2024)