A possible mix of inflows, coupled with banks going below the statutory Reserves' Ratio (SRR) requirement of 6%, uplifted market excess liquidity on a net basis to Rs 23,404.8 million at yesterday's trading, Central Bank (CB) data showed.
Banks have to meet the SRR requirement twice monthly only, ie at the middle of the month and at the month end. On other days like yesterday, they are allowed to play around with their SRR requirement.
However, money printing as a ratio of excess liquidity was at a high of 183.13% yesterday, a reflection of a dearth in inflows to the market due to the current global situation where the world's 2nd largest economy China is in turmoil and expectations that the Federal Reserve System will raise its near zero lending rates last increased nine years ago by the year end. That has resulted in foreign investors exiting from markets such as China and Sri Lanka and re-parking such investments in US based assets, thereby also causing downward pressure on local currencies.
Money printing is reflected by CB's Treasury Bill holdings, which translates to CB lending to the government,was Rs 151,708.98 million yesterday; whereas a year ago, under the previous regime, it was zero or nought!
Money printing causes demand side inflationary pressure which hurts the poor and the fixed wage earner the hardest. Heavy government borrowings are due to the government having to meet its election promises in respect of the 8 January, 2015 Presidential Polls and the 17 August, 2015 General Elections respectively.
Nevertheless, yesterday was also the first anniversary of a controversial decision made by the previous regime, where, in its monetary policy statement for September 2014 released on 23 September, 2014, it introduced a two tiered Standing Deposit facility Regime in an attempt to boost interbank lending.
Those comprised the standard, standing deposit facility rate (SDFR) which was then 6.5%, applicable for only three market days of a calendar month, whereas the penal deposit rate, introduced on that day, which was 5%, was applicable for all other days.
But that resulted banks, mainly foreign, which were the main custodians of excess liquidity, parking such in their own vaults due to limits constraints applied to by their head offices, thereby, not boosting or giving a fillip to interbank lending. The two tiered SDFR regime was removed by the present regime.
Meanwhile, the weighted average rate (WAR) of call money remained unchanged at 6.35%, whereas the WAR of overnight market repo transactions declined by five basis points to 6.39% yesterday.
Courtesy: Ceylon Financial Today 24 September 2015