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Money Market Riddled With Distortions

 

  • T Bill Yields Fall; Call Money, Market Repurchase Rates Rise

Speculation was rife that cash rich state owned Bank of Ceylon (BoC), rich because of its recently concluded US$ ($) 500 million Bond sale, was the investor at Wednesday’s Treasury (T) Bill auction, which saw yields coming down across all maturities.
In a scenario where only BoC and foreign banks are liquid, whereas all other market participants are illiquid, thereby prompting them to borrow from the market to meet their liquidity requirements, it’s inexplicable that the weighted average yields (WAYs) of Treasury (T) Bills across all maturities should have had come down, like they did on Wednesday, a market source told this reporter.
As it is, rupee liquidity in the market is shrinking caused by the demand for $s, which in turn is causing pressure on interest rates.
Market’s excess liquidity which was Rs. 23,774 million on Wednesday, shrank by Rs. 4,608 million to Rs. 19,136 million the following day Thursday and ended the week at Rs. 13,411 million, a further Rs. 5,725 million decline.
As if to prove that T Bill yields declines were a distortion, the weighted average rates (WARs) of call money and market repurchase transactions went up by two and one basis point (bp) to 9.89% and 8.88% respectively on Friday, and in the previous day Thursday by  two and three bps to 9.85% and 8.87% respectively, following the previous day (Wednesday’s) increase of those rates by one and four bps to 9.83% and 8.84% respectively. Meanwhile T Bill yields of the 91, 182 and 364 day tenures at Wednesday’s auction went down by 41 and eight bps each (for both the 182 and 364 day tenures) to 11.58%, 12.32% and 12.50% respectively at Wednesday’s auction.
Anyway, investing in T Bills still give BoC a better return than investing in either Central Bank of Sri Lanka’s (CBSL’s) repo window or by being a participant in CBSL’s repo auction, where the rates offered are 7.75% and 8.67% (ie the WAY fetched at Thursday’s repo auction) respectively, the source said. However that may be, at the beginning of last week on Monday, the WAR of call money transactions (the rates at which banks borrow among each other for a day) rose by six bps to 9.80% over the previous day’s (Friday, May 18) close, while overnight (o/n) market repurchase transactions (ie interbank borrowings after offering as collateral gilt edged T Bills) rose by two bps to 8.80%. The following day Tuesday, call money transactions went up by a further two basis points to 9.82%, however o/n market repurchase transactions stagnated at the previous day Monday’s 8.80% level, but both of these indicators began to increase in the following two market days.In other developments, commercial banks’ average weighted prime lending rate (AWPR), ie the rate at which it charges blue chip borrowers increased by eight bps to 13.27% in the week ended May 18, week on week, while its increase from a year ago was a stupendous 315 bps. Sri Lanka is mainly an SME driven economy, which category, in its bank borrowings, are subjected to far higher interest rates than the AWPR value. But when interest rates rise, such a sector is also liable to default on its loans, which in turn may cause a systemic risk to the island’s banking sector.
Similarly, if this sector crashes or defaults or finds borrowings too expensive due to higher rates demanded or charged, and  as a result, deferring from seeking bank credit, that will also impede job creation and production increases, which may otherwise bring in added revenue, by exports or otherwise, thereby crippling the economy as a whole.
So a lower interest rate regime is always good for the economy, a regime that may be achieved if the right policies, whether they be economic, political or social, being not only in place, but by also being implemented.
However that may be, Monday saw CBSL’s T Bill holdings increasing to Rs. 243,491.25 million; after falling to the Rs. 222,339.13 million the previous market day (Friday May 18) from Rs. 246,938.03 million on Thursday, May 17 (see also last week’s business pages of this newspaper’s).
It’s speculated that the increase in CBSL’s T Bill stock is due to the retirement of a term repo transaction, possibly emanated from BoC, which recently sold a $ 500 million bond to international markets.
An increase in CBSL’s T Bill holdings is generally translated to the fact that there is too much money in the economy, causing demand side inflationary pressure. An avenue by which new money enters the economy is by CBSL subscribing to T Bills and releasing new money in lieu. In contrast CBSL’s T Bill holdings a year ago were a mere Rs. 2,247 million.
An abnormal increase in money supply also causes inflationary pressure on the economy, tending interest rates also to rise (see also the lead story on the business pages of this issue’s 29.4.12. edition).
On Wednesday, the value of CBSL’s total T Bill stock was Rs. 243,492.10 million; including a sum of Rs. 23,774 million blocked in reverse repo and repo transactions-ie surrendered as securities to banks, while in the following day Thursday its total T Bill stock was Rs. 243,471.09 million, before closing the week with a figure of Rs. 238,803/30 million; giving rise to the speculation that it has retired a partial amount of its massive T Bill stock.

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