Central Bank (CB) continued to defend the exchange rate (ER) at Rs 133.80 to the US dollar in interbank spot trading for the 2nd day running yesterday, by offering dollars to the market at that discounted price from its foreign reserves.
Pressure for the rupee to depreciate is mainly caused by foreigners exiting from the government securities market and the stock market due to the current political uncertainty prevailing in the country.
CB's discounted dollar sales from its reserves are based on the conditionalities that those needs are within banks' net open positions, coupled with the submission of necessary import documents.
As a result, volumes traded in the foreign exchange (FX) market are thin. The market expects this uncertainty in the FX market to continue until the 17 August, 2015 General Election are over.
"Then there will be political 'certainty' hopefully for the next five yeaRs With that will come policy certainty which will be reflected on the FX market vis-à-vis a direction for the ER, which will ipso facto dissipate the prevailing uncertainty in the FX market by allowing it to settle down to near normal levels," they said.
Sri Lanka runs a deficit in the current account in the balance of payments complemented by a negative trade balance. That causes depreciating pressure on the rupee.
Meanwhile, at yesterday's Treasury (T) Bond primary auction, CB borrowed only Rs 15,720 million from the market, short of the original figure of Rs 20,000 million asked for, due to higher yields demanded by the market because of the tight liquidity situation prevailing in the market.
A reflection of this is that money printing as at Monday was 85.63% or Rs 55.15 billion of market's excess liquidity. (See also yesterday's Ceylon FT). The dearth in excess liquidity by natural causes, namely inflows which have come to a standstill are due to the current unstable political situation in the country.
As a result, the weighted average yield (WAY) of the 2018 maturity increased by as much as 100 basis points (bps) over the previous auction held for this tenure which was only three weeks ago to 8.18%, while the WAY of the 2023 maturity increased at a relativelyshorter speed, by 76 bps to 9.58%, when compared to the WAY fetched for this maturity at the previous auction held only two weeks ago.
The increase in short-term yields relative to long- term yields is an indication that investors feel that the current unstable political situation in the country is temporary.
Today, CB will be conducting a T Bill auction, where it plans to raise Rs 20,000 million on behalf of the government. A reflection of yesterday's T Bond auction where short-term yields rose much more rapidly than long-term yields shows that today's T Bill auction would also get a taste of the former's medicine.
At the previous auction, T Bills of 91 and 182-day maturities saw their WAYs increase by three and five bps each to 6.14% and 6.26% respectively, while that of the 364-day maturity stagnated at 6.28%.
Meanwhile, yesterday's T Bond auction saw CB accepting Rs 11,050 million worth of offers for T Bonds of 2023 maturity at a WAY of 9.58%, up from the original offer of Rs 10,000 million and T Bonds of 2018 maturity: Rs 4,670 million, down from the original offer of Rs 10,000 million and at a WAY of 8.18%.
CB last had a T Bond primary auction for T Bonds of 2018 maturity three weeks ago on 23 June, 2015. CB originally had on offer Rs one billion worth of T Bonds at that auction, but ended up selling Rs 1.5 billion of those at a WAY of 7.18%.
Likewise, CB last had a primary auction for the sale of T Bonds of 2023 maturity two weeks ago on 29 June, 2015. Those fetched a WAY of 8.82%. CB originally had on offer Rs 10 billion worth of those maturities for sale, but ended up selling Rs 15.3 billion to the market on that day.
With yesterday's T Bond sale of Rs 15,720 million, that will take the present government's domestic borrowings in the calendar year to date to
Rs 995,900 million. In the corresponding period the previous year, the former regime borrowed a mere Rs 487,608 million by selling T Bonds and T Bills to the domestic market.
Therefore, borrowings of Rs 995,900 million is an increase of Rs 508,292 million or 104.24% over similar borrowings made by the previous regime. Such borrowings also include borrowings made to pay maturing debt.
Such increased borrowings by the current regime is to honour promises made to the electorate in the context that they would have to again face the voter on 17 August.
Courtesy: Ceylon Financial Times 15 July 2015