Business as usual in forex, money markets


It was business as usual on Wednesday with the Central Bank continuing to defend the exchange rate amidst strong importer demand which saw intervention drain out rupee liquidity in the system which resulted in the Central Bank having to pump in Rs. 17 billion into the system.

"The exchange rate was kept unchanged at Rs. 114.30 against the dollar after falling 40 cents since Friday. Import demand is still strong and the Central Bank was still intervening in the market selling dollars to keep the exchange rate steady, so it seems it is business as usual now that the IMF Review Mission is gone," a dealer told The Island Financial Review yesterday (Feb. 08).

The dollar sales had wiped out liquidity which resulted in the Central Bank having to pump in Rs. 17 billion into the system. The bank has so far printed over Rs. 300.62 billion over the past few weeks to help banks get over the liquidity crunch. Yesterday, the bank’s Treasury bill holdings increased to Rs. 205.36 billion from zero last August.

The Central Bank last Friday increased key policy interest rates to curb credit demand, which was also expected to tighten credit for imports. The bank also said it would allow some flexibility in the exchange rate. The rupee fell by 20 cents on Friday and again by the same amount on Monday to close at 114.30. Yesterday, the rupee’s position was defended.

Interbank borrowing rates fell slightly to 9.56 percent (call money rate for borrowings not backed by collateral) from 9.63 percent the previous day on account of the Rs. 17 billion injection. However, the interbank market repo rate for borrowings against Treasury bills inched up 8.63 percent from 8.60 on Monday. A week ago the rate was 8.14 percent the call money rate was 8.80 percent.

The Sri Lanka Inter Bank Offered Rate reached 9.67 percent from 9.66 on Monday. A week earlier the rate was 9.08 percent.

"Credit demand continues to feed import demand and unless the rupee is allowed to be more flexible we would continue to face pressures on the balance of payments," a dealer said.

The Central Bank has sold more than US$ 2.5 billion since July 2011 to defend the exchange rate, despite the three percent devaluation in November.

The International Monetary Fund has been critical of the Central Bank’s exchange rate policy but last Friday it said the programme could continue after it was encouraged by the Central Bank’s decision to curb credit growth and relax its hold on the exchange rate.

Meanwhile Treasury bond yields rose across the board yesterday.

The two year bond maturing in 2014 saw its yield move to 10.60/70 percent yesterday from 10.50 last Monday and a three year bond saw its yield increase to 10.70/90, dealers said.

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