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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » US$ 76M to protect rupee, Rs 8B printed money for commitments

US$ 76M to protect rupee, Rs 8B printed money for commitments

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Melissa Pereira


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
The Central Bank (CB) expended a massive US$ 76.07 million from its foreign reserves at yesterday's trading to meet the dual purpose of foreign debt servicing commitments and to prevent rupee depreciation, data showed.


Nevertheless, gross inflows due to the government sale of US dollar denominated Sri Lanka Development Bonds (SLDBs) a few days ago uplifted market's excess liquidity by Rs 30.1 billion ($ 224.93 million) at yesterday's trading. Conversions are made, based on the current, administered spot rate of Rs 133.80 to the dollar in interbank trading. CB executed trades in "spot."



However, despite such foreign borrowings, that didn't satisfy the government's appetite for more rupees, resulting in CB printing and lending a further Rs eight billion, thereby stoking demand side inflationary pressure on the economy, hitting the poor and the fixed wage earner the hardest.



Money printing, reflected by CB's Treasury (T) Bill holdings, increased to Rs 71.2 billion, and excess liquidity, helped by SLDB conversions, passed the Rs 100 billion mark to Rs 101.3 billion yesterday.
Nevertheless, with the market being sloshed with excess liquidity, the weighted average rate of call money decreased by four basis points to 6.14%, though that of overnight market repo transactions stagnated at 5.91%.
Courtesy: Ceylon Financial Times 16 July 2015

slequityanalyst


Manager - Equity Analytics
Manager - Equity Analytics
My view is that these USD borrowings will be short term solutions to a more fundamental problem. Global macro changes will however have long term impacts on LKR. As evidenced by this:http://www.cnbc.com/2015/07/15/feds-yellen-remain-on-track-to-raise-rates-this-year-if-economy-evolves-as-expected.html.

This intersting article gives some insights on impacts of such a measure on emerging markets: http://www.theguardian.com/business/2015/jun/30/fed-rates-hike-emerging-markets-nouriel-roubini

I think it is better to look at Lanka (a frontier market) from that perspective. If Fed hikes, LIBOR will also move accordingly. So, all the GoSL borrowings at LIBOR+ will head north. 

Hope things won't be as bad!!

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