Sri Lanka's central bank kills Rs19bn in printed money, supporting rupee

ECONOMYNEXT - Sri Lanka's central bank killed 19 billion rupees of printed money Friday selling down its Treasury bill stock to 50.53 billion rupees from 69.11 billion rupees, which analysts say will help support the rupee.

The aggregate balance of the banking system dropped to 3.53 billion rupees on April 27 from 23.93 billion rupees a day earlier as the weekly Treasury bill auction was settled.

Some banks were excess by 21.3 billion rupees which were deposited in the 7.25 percent repo window of central bank while others borrowed printed money at 8.50 percent from the reverse repo window of the central bank at 8.50 percent.

Analysts say it is important for banks which are short - those who are lending or buying bonds without having deposits - to be forced to borrow at the maximum rate possible so that the rupee will not collapse.

Sri Lanka's foreign banks which have superior banking practices, hardly ever pressures the currency by borrowing printed money from the central bank, unlike private banks, especially state banks, which are frequently overdrawn by the Treasury.

The two largest foreign banks in Sri Lanka, HSBC and Standard Chartered issues currency in Hong Kong on behalf of the Hong Kong Monetary Authority, which operates a fixed exchange rate or currency board. The Hong Kong currency did not fall even during the Asian financial crisis.

The rupee fell sharply in April after the end of a seasonal holiday after the central bank injected cash via reverse repo auctions at rates as low as 7.6 percent to enforce a rate cut on April 04 on top of a seasonal demand for cash.

The central bank terminated term repo deals in later March and bought at least 30 billion rupees in Treasury bills on April 02, the day a large bond maturity was settled sending its bill stock from 12 billion rupees to 43 billion.

The day after the rate cut was announced, the bill stock shot up to 75 billion rupees. On April 23, the stock went down to 50 billion rupees.

Many of the term reverse repo injections have also expired.

The domestic operations department of a central bank is the only agency that can de-stabilize the rupee by giving excess cash for banks to lend to importer and speculators hit the currency.

In the absence of a domestic operations department which prints money to keep rates down (and prevent a contraction of the money base), a monetary authority can easily defend a currency by selling down a fraction of its reserves and allowing the monetary base to contract. The selling down of Treasury bills also contracts the monetary base, though banks can still get printed money from the window.

Without a domestic operations department to create fresh money no speculator can hit an exchange rate as George Soros, the-man-who-failed-to break the Hong Kong currency board, found to his cost (Soros praises HK for blocking his dollar 'attacks').

Sri Lanka's central bank in 2017 pushed the rupee down though it was sterilizing dollar purchases amid slower credit. (Colombo/Apr27/2018)

Thanks Invi