Sri Lanka injects Rs75bn to sterilize cash short

Sri Lanka has injected 75 billion rupees through a overnight and 7-day term reverse repo auction to sterilize a liquidity shortage that has cropped up amid pressure on a rupee soft-peg with the US dollar.

The central bank injected 30 billion rupees for 7-days through an open market auction, at a weighted average yield of up to 8.17 percent.

The central bank has an overnight liquidity facility rate of 8.50 percent could inject 7-day money at a higher rate closer to the Sri Lanka Interbank Offered Rate to help protect the rupee, economic analysts say.

Another 39.16 billion rupees were injected overnight at a weighted average rate of 8.10 percent with the lowest bid accepted at 7.95 percent, 55 basis points below the ceiling policy rate.

Banks borrowed 16.49 billion rupees from the 8.50 window and cash plus lenders deposited 1.57 billion rupees in the 7.25 excess cash window.

The central bank has now kept money markets short for 6 straight days of prudent policy which tends to support the rupee when a float is made. Until September 14, money markets were excess, which tends to push the currency down in the case of a float.

Analysts say keeping the market short overnight for around 30 billion rupees will help any float take hold faster.

In July the central bank pegging actively buying dollars and injecting cash from a swap in the style of a peg. However it failed to guide the peg in the wake of unsterilized purchases with unsterilized sales when excess liquidity jumped to over 50 billion rupees overnight in July and August.

The spot US dollar closed at 168.85/169.05 levels Tuesday amid interventions.

The current liquidity shortage coincided with a legacy 2013 swap that matured, as well as interventions, which now being sterilized through overnight term reverse repo auctions. A float will help end interventions. (Colombo/Sept26/2018)