CB lending money to the government translates to money printing, in the absence of inflows. Such money printing causes demand side inflationary pressure on the economy, hitting the poor and the fixed wage earner the hardest.
Money printing is spurred by the recent Rs 10,000 salary increase to public servants, as a result of which the Treasury has to monthly cough up Rs 30 billion to meet such commitments.
Twenty six point four per cent of market's excess liquidity
(Rs 23,080.73 million or Rs 23.1 billion), reflected by CB's Treasury (T) Bill holdings, is due to such money printing.
In related developments, CB's defence of the rupee, due to the absence of inflows, caused US$ 30.41 million to fly out from CB's reserves to meet such commitments, chiefly driven by foreign exits from the government securities and stock markets due to the prevailing political uncertainty.
Government doesn't want a depreciated rupee as that would make imports more expensive. Due to this action, a minimum of Rs 4,068.59 million (Rs 4.1 billion) excess liquidity was withdrawn from the market to meet such commitments, thereby causing upward pressure on rates.
Nevertheless, with market's excess liquidity at
Rs 87,383 million (Rs 87.4 billion), the weighted average rate of call money declined by one basis to 6.10%, while overnight market repo transactions remained unchanged at 5.84% as at Friday.
For purposes of conversions, the exchange rate (ER) has been valued at Rs 133.80 to the US Dollar in interbank spot trading. However, on Friday, CB depreciated the ER by 20 Sri Lanka cents to Rs 134.
Courtesy: Ceylon Financial Times 14 June 2015