Banks increase borrowings from CB as liquidity tightens further

* Rupee strengthens

Benchmark Treasury bill rates and overnight interest rates increased further as rupee liquidity continued to tighten with commercial banks increasingly borrowing from the Central Bank to maintain positions.

The Central Bank injected Rs. 5 billion into the banking system on Tuesday (Mar. 6) as rupee liquidity continued to tighten. It had pumped in Rs. 9 billion over the previous two days which saw the interest rate for these transactions pick up to 8.8 percent from 8.75 percent last Friday.

Commercial banks are also increasing their borrowings from the Central Bank via the reverse repurchase window at 9 percent which is where the monetary authority acts as a lender of last resort to commercial banks facing liquidity issues. On Tuesday, commercial bank borrowed Rs. 8.63 billion, the highest since last Thursday where Rs. 4.9 billion was borrowed; a total of Rs. 23.73 billion has been borrowed since then.

Overnight call money market rates for interbank borrowings without security inched up on Tuesday to 9.78 percent from 9.7 percent the previous day. Market repo rates for interbank borrowings backed by securities increased to 8.78 percent from 8.68 percent the previous day. The overnight Sri Lanka Inter Bank Offered Rate increased to 9.81 percent from 9.73 percent a day earlier.

Benchmark Treasury bill rates jumped, with the yield on the three months bill moving up 30 basis points from last week to 9.81 percent at this week’s primary market auction held on Tuesday. The six months bill saw its yield move up 24 basis points to 10.18 percent and the 12-months bill moved up 15 basis points to 10.45 percent.

The auction was for maturing bills amounting to Rs. 10 billion. Bids amounted to Rs. 21.1 billion but only Rs. 9.47 billion was accepted.

Meanwhile, the rupee gained some ground against the dollar on Tuesday, closing at Rs. 121.45/55 after opening the day at Rs. 121.90/122.

Dealers said recent Central Bank regulations issued to commercial banks on the exchange rate would dampen speculation but feed volatility.

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