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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » CB conditions kill market

CB conditions kill market

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1CB conditions kill market Empty CB conditions kill market Fri Jun 12, 2015 8:53 am

Melissa Pereira


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
Yesterday was the third consecutive day that Central Bank (CB) was offering US Dollars at a discounted spot rate of Rs 133.80 per unit to the market under certain conditions which killed trading, sources told Ceylon FT.

With demand outnumbering supply, CB, based on banks' net open positions and the submission of import documents were releasing dollars to banks at the discounted spot rate of Rs 133.80, from its foreign reserves, whilst at the same time draining out excess liquidity from the market, thereby creating upward pressure on rates.



There was little free market play due to lack of exporter conversions, they said. Sellers on the other hand want more rupees for their dollars, the sources said. On the previous day Wednesday, there were bids for dollars at the Rs 135.70-75 levels in three months' forwards, but there were no sellers even at, those high bids, they said.



As a result of CB's intervention in the foreign exchange (FX) market, a minimum of US$ 34.03 million was drained out from CB"s foreign reserves the previous day, Wednesday, while at the same time a minimum of Rs 4,552.96 million was also paid out to CB from the money market in a quid pro quo arrangement. Due to this, the weighted average rate of overnight market repo transactions increased by four basis points to 5.85%, though that of call money remained unchanged at 6.11%.



As a result of such transactions, market's excess liquidity went down from Rs 91,129 million to Rs 86,580 million on Wednesday. Of this amount, 21.3% or Rs 18,425.17 million comprised printed money in the form of CB's Treasury holdings, a reflection of how much of money it has lent to the State. Nevertheless, lending money by printing causes demand side inflationary pressure, hitting the poor and the fixed wage earner the hardest.



Meanwhile, the government is set to increase its borrowing by selling government securities to a record Rs 70 billion, this week, by offering Rs 12,000 million worth of Treasury (T) Bonds to the market today. Earlier this week it sold Rs 58,283 million worth of T Bills and T Bonds to the market.



With today's envisaged borrowings, that will take government borrowings from the domestic market by selling Government securities to Rs 817,713 million (Rs 0.82 trillion) in the calendar year to date. In the same period this way, the then government borrowed only Rs 392,609 million in the review period.



Therefore, a borrowing of Rs 817,713 million is a 108.28% or a Rs 425,104 million increase over borrowings made in the same period last year. Similarly, the Government's external commercial borrowings in the two comparative periods increased by 2.3% or by US$ 38.75 million to $ 1,687 million vis-à-vis current year's borrowings.



Government borrowings, by way of money printing also increased, year on year, from Rs 289.47 million as at 11 June, 2014, to Rs 18,425.17 million as at Wednesday, 10 June, 2015, a Rs 18,135.70 million or a 6,265.14% increase. Such increases are due to 'election bribes' by the present regime, with a general election round the corner
Courtesy: Ceylon Financial Times 12 June 2015

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