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Join date : 2015-12-16
Sri Lanka banks borrow Rs16.7bn in liquidity; overnight rate tops policy ceiling
Liquidity runs short during balance of payments crises as a central bank defends a dollar peg selling its dollar reserves sucking liquidity out.
However it then injects more liquidity through the overnight window at a ceiling policy rate, keeping the credit fire burning and rates down, worsening the crisis.
For the last two weeks Sri Lanka has been in the classic 'sterilized forex sales' mode, which is characteristic of full blown balance of payments crises.
In Sri Lanka the central bank also buys Treasury bills outright engaging in 'quantity easing' and making it easier for banks to give more loans, permanently sterilizing the interventions.
Even this week the central bank rejected bids of the Treasuries auction.
In money markets the policy, gilt backed overnight rates rose to as much 8.50 percent, data showed, 50 basis points higher than the ceiling policy rate of 8.0 percent.
In the clean money market however the highest reported rate was only 7.90 percent, which is an aberration.
However dealers say in the interbank market where clean cash is traded, banks can borrow at these levels from the more liquid entities which are usually foreign banks.
There was 8.0 billion rupees deposited in the central bank's 6.50 percent window, indicating an unwillingness on the part of liquid banks to lend to others - which are considered more risky - even at a higher rate.
On Friday when the money printed to repay Treasury bills hit the market, the liquidity short can reverse, giving more ammunition for credit, import demand and currency pressure.