hariesha wrote:The big deal we expected is happening. Which shares seller will buy?
(Read from bottom up)
7. Student of Economics Mar 17
Fuss is correct when he says that there will not be an increase in money supply.
The mechanics of the transaction is as follows.
The Malaysian buyer will have to open a SIERA account in a bank and deposit $ 120 mn. The bank will buy dollars and make available the rupee equivalent to EPF. It does so from the money already in the system and not by making a book entry, because EPF immediately withdraws that money for its use.
EPF now has liquid funds amounting to Rs 14 bn. It could reinvest the same in the share market or lend to the government. In the first case somebody in the share market will get the proceeds and in the second case people who provide services to the government will get the proceeds through government's expenditure. In either case, money goes back to the hands of the people.
This is where the dispute has arisen, whether they would use it for imports or buy local goods or invest back in banks.
Sri Lankans are notorious for consuming a bulk of their income and on average, on every rupee they get, they consume about 84 cents. Hence, what goes back to banks is just 16 cents.
Of consumption, they also have a high propensity to consume imported goods and services: of the total income of $ 55 bn in 2011, they have used imported goods and services of about $ 27 bn or about 49%. Hence, a bulk is expected to go out of SL contracting money supply.
The net result is that the country has got $ 120 mn in exchange for a piece of the assets of the country.
6. DillonDP Mar 17
A beautiful Drama
5. fuss Mar 16
Sure they do. Reserve money only grows say 500 to 1000 million dollars an entire year if inflation is low and the exchange rate is fixed.
So where does the rest of the 25 billion in inflows go? Imports, outbound travel, overseas investments and so on. Our capital account is not free.
If credit is slow (or negative) central bank can mop it up and build up reserves. Unless they are mopped up they will go out.
All inflows, other than the net increase in official reserves, which (we call a balance of payments surplus) goes out.
Trade is the primary channel. The credit system matches agents who want to spend (primarily the state which is a net dis-saver) with the people who save (only private citizens).
4. gonz Mar 16
Fuss, do you think people in this country does nothing but import from other countries from all what they earn or get to their hands. lol
get practical, just use common sense.
3. fuss Mar 16
Just a small clarification. Money supply will not increase if local assets are bought. Money supply will increase if the central bank buys the dollars which are brought in to buy the assets.
In effect, if the rupees were sold directly to the central bank, the market will not see the dollars (rupee will not experience upward pressure) but the market will only see the rupees (downward pressure).
Let's take if forward a little. Say the EPF got the new money. EPF will then buy government bonds with it, say. Government will use it to pay salaries. Or the government will use it to retire maturing bonds and keep rates down. That will push up import demand either way.
Or say one of the private investors who sold out today deposited in his bank at 13.0 percent. The bank will loan it out and that will generate import demand. So the dollars in the central bank will have to be sold to keep the peg. If the central bank keeps the dollars and does not defend, the rupee will have to fall to a level sufficient to re-balance 14 billion rupees of excess demand created by this transaction.
Ok so far?
Even if the central bank does sell the dollars, when the import demand comes, unless it refrains from sterilizing the 14 billion liquidity shortage that results from the forex sale and allow rates to go up, additional demand will be created by another injection.
The pressure on the exchange rates comes from a problem in the domestic monetary system relating to credit and liquidity and the way the central bank's operators are structured. It has nothing to do with inflows. Credit has to slow, deposit raising has to increase by working through rates. Then the peg will stabilize.
2. gonz Mar 16
Rajeewa, please do not say unless you are sure of what you say. when govt sells $s to defend currency it causes money supply to contract (unless CB buy bonds) and when foreigners buy local assets it increase local money supply.
1. Rajeewa Mar 16
This is a the same as the central bank selling dollars to defend the rupee. This time government just selling big chunks of their portfolio to defend the currency. Nothing else.
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