Reserves were uplifted due to the receipt of the last tranche of the Reserve Bank of India's US$ 1.5 billion swap arrangement.
This tranche comprised US$ 1.1 billion. The first tranche of US$ 400 million was disbursed in April 2015.
Meanwhile, the government's foreign debt servicing commitments from the 12 month period beginning end September 2015, vis-à-vis the 12 month period beginning end August 2015, is envisaged to marginally increase by 1.67% to US$ 7,978.3 million.
However, with the advent of the tourist season, the receipt of the US$ 1.5 billion sovereign bond issue which was due to be settled either yesterday, if not today, coupled with seasonal remittances because of the Christmas season, are expected to increase the island's foreign reserves further.
In related developments, the partial free float of the rupee on 4 September, 2015 is also expected to protect any deteriorating pressure on Sri Lanka's foreign reserves, because of a more expensive US dollar. Currently, only the Government of Sri Lanka's foreign debt servicing commitments are met from the island's foreign reserves.
The foreign exchange market is avoided to meet such commitments because that would then cause downward pressure on the rupee. Sri Lanka is an import dependent economy. Therefore, a weak rupee will cause supply side inflationary pressure on the economy.
Similarly, the US$ 1.5 billion sovereign bond proceeds would also bypass the FX market, because if that wasn't to be, that would cause a massive appreciation of the rupee, hurting the competitiveness of the island's export sector.
Therefore, it's likely, that while part of the sovereign bond proceeds would be used for foreign debt servicing by being sold to the Central Bank of Sri Lanka (CBSL) and the remainder to further uplift the island's foreign reserves. A reaction to those activities would be, the uplift of rupee excess liquidity, thereby also soothing rates.
Nonetheless, the totality of the sovereign bond proceeds may not be sold to the Central Bank of Sri Lanka (CBSL) immediately either, because that massive burst of excess rupee liquidity that such an action would cause, would flood the money market, thereby causing demand side inflationary pressure on the economy.
Nonetheless, a substantial amount of that $ 1.5 billion sovereign bond inflow may be used to retire a sizeable chunk of CBSL's Treasury Bill holdings, thereby mitigating possible demand side inflationary effects on the economy, while some of the other proceeds may be held in a Treasury dollar account maintained with the CBSL, and sold to the latter in doses, so as not to upset the equilibrium in markets.(PGA)