Sri Lanka central bank starts selling banknotes without spot forex market
ECONOMYNEXT – Sri Lanka’s central bank has started selling its permanent stock of treasury bills outright, a move that can potentially reduce private credit and imports and replenish foreign exchange reserves, if there was a market for spot exchange.
The central bank sold 2.0 billion rupees 77-day bills at 7.08%, 2.0 billion rupees 84-day bills at 7.18%, 91-day bills also at 7.18% and 98-day bonds at 7.23%.
If there were credibility of a soft-peg at 200 for the US dollar, private credit would decrease by at least the amount of bills sold to the banking system, reduce imports, and the central bank would be able to purchase bills. dollars in the interbank. market while outflows of dollars were reduced.
However, most of the downselling of the central bank’s outright portfolio is now being picked up through the central bank’s reverse repurchase window.
The central bank had also sold maturing notes on its wallet in recent note auctions, after price controls were lifted at the auctions.
However, most of the securities also ended up at the central bank through reverse repo transactions.
On December 3, the outstanding central bank treasury bills fell to Rs 1,414.67 billion from Rs 1,433.91 billion on December 01. However, reverse repo injections fell from Rs 233 billion to Rs 264 billion.
Another 33.75 billion was mopped up through repo auctions at 5.97 percent.
Bearish selling, however, reduces the central bank’s interest rate risk if higher rates are to come and increases the commercial bank’s rate risk by exacerbating an asset-liability asymmetry. (Colombo / Dec04 / 2021)