A massive US$ 42.16 million was drawn out from Central Bank's (CB's) foreign reserves yesterday, probably due to government's foreign debt servicing commitments. Foreign debt servicing is executed by CB's reserves and not by the foreign exchange (FX) market for fear that it would cause depreciating pressure on the rupee in the market. CB deals in spot, where settlement takes place after two market days from the date of transaction. So, yesterday's exercise would have been on transactions entered to on Tuesday, where the exchange rate (ER) in interbank spot trading was floating at Rs 137.75 to the US dollar.
Meanwhile, yesterday, the ER sharply weakened by between 15 to 35 Sri Lanka cents (SLc) to Rs 138.95/139.05 to the dollar in two way quotes in interbank spot trading around 3.45 pm yesterday, from the previous day, i.e. Wednesday's close.
CB last Friday free floated the rupee, which has seen it depreciate by between 3.08% to 3.12% (Rs 4.15 to Rs 4.20) since, mainly due to foreign exits from the government securities market and the Colombo stock market. It was last protected by CB a week ago, i.e. last Thursday (3 September) at Rs 134.75, by dipping from CB's foreign reserves at that discounted price to meet the FX market's need for dollars.
As a result of yesterday's action, money market's excess liquidity was depleted by a sum of Rs 5,849.2 million; resulting in money printing, reflected by CB's holdings of Treasury (T) Bills, now wholly due to CB's lending to the government, increasing to 229.09%, from the previous day's figure of 207%.
This is a sign of a dearth of inflows in to the market. Market's excess liquidity yesterday was Rs 54,089 million and CB's book value T-Bill holdings: Rs 123,913.89 million. Nevertheless, the weighted average rates of call money and overnight market repo transactions stagnated at 6.34% and 6.30% respectively.
However, in secondary market trading of T-Bonds, yields of 2019 and 2023 maturities fell by five basis points each to 9.30% and 10% on thin volumes at yesterday's trading, sources said. They attributed these falls to Wednesday's rejection of its T-Bill auction because the market was asking for higher yields than that which the government was prepared to pay.
"We shall have to wait and see what the government's reaction would be at next week's T-Bill auction before reaching a decision as to whether the government is adamant on a low interest rate regime or not," they said. Shorter tenures didn't gain investor attention at yesterday's secondary market trading in treasuries, the sources said.
Courtesy: Ceylon Finance Today 11 September 2015