The Sunday Leader

Markets Hit As Anti Lanka Vote Passed

Market jitters over DMK quitting the Congress led coalition government in India over alleged human rights (HR) abuse by Colombo during the closing stages of its war against the LTTE was having an impact in secondary market trading in Treasury (T) Bonds which yields have had also expanded during the past month, a source told this newspaper on Tuesday.

He said that interest was witnessed in the longer tenures, with yields of the 2018 maturities having had increased by 10 basis points (bps) in the first two days of trading last week and by 30 bps in a month to 11.30%.

Similarly yields of 2016 and 2017 maturities during the past month have had increased by 20 bps each to 11.20% and 11.30% respectively, he said.

Additionally, events leading to the UNHR Council’s (UNHRC’s) negative vote against Sri Lanka at Geneva have had seen the exchange rate (ER) in interbank spot trading against the US dollar ($) declining by 75 Sri Lanka cents (SLc) week on week (WoW) as at Thursday, before marginally recovering the following day due to the absence of state buying from the market.

Meanwhile in the 13 day period, ie from March 8 to March 21, yields of 2014 maturity T Bills in secondary market trading has had increased by 12 bps, that of 2014 T Bonds by 15 bps and that of 2018 maturing T Bonds by 10bps.

The following day Friday, secondary market trading in T Bonds and T Bills were restricted to thin trades vis-à-vis T Bonds of 2014 and 2015 maturities, with their yields going up by 15 bps each to 11.25%.

The long weekend (Tuesday, March 26 is a poya holiday for the market) deflected interest on the market on Friday, a source said.
In earlier developments, with yields at Wednesday’s T Bill auction increasing (see connected article found elsewhere on this page), in tandem with those hikes, yields of T Bills and Bonds too increased, taking up those yields as at Thursday to: T Bills of 2014 maturity to 11.30% (Wednesday’s T Bill auction saw this tenure’s weighted average yield (WAY) increase by seven bps to 11.26%), T Bonds of 2014 maturity (11.10%), 2016 (11.20%), 2017 (11.30%) and 2018 (11.40%) respectively.

The stock market too is suffering from a similar negative effect, compounded by a liquidity crisis besetting the economy which makes the fixed income market a far better proposition for investments rather than the stock market, coupled with the condemnation by the rest of the world led by the USA and EU, the island’s largest export and tourism markets on the country’s allegedly dismal HR record which condemnation was won

by a majority vote at the UNHRC session at Geneva on Thursday, also having a negative impact on the bourse, a source said.
It passed the Rs. billion mark on Friday due to alleged window dressing by a large blue chip conglomerate and its subsidiaries which businesses also encompass insurance and food, targeting the fiscal year ended March 31 results, the date of which is round the corner, by internal transfers, he said.

“Penny stocks are largely driving up market indices with other stocks too following, targeting March 31,” the source further said.
Matters have had been made worse due to the alleged anti Muslim sentiment created by Bodu Bala Sena, an extremist Buddhist sect, allegedly with the blessings of certain powerful personalities,  further impinging on the stability of the stock market.

Secondary market trading in T Bills and T Bonds was mainly driven by locals with foreigners hardly active in the market last week, a source said.

He said that the turning point from a yield (interest) declining regime to a yield rising regime began in earnest after the previous week’s T Bill auction, where the WAYs for all three tenures on offer at that T Bill auction rose by five bps each.

However, yields may once more be on the declining trend if there is a policy rate cut, he said. Central Bank of Sri Lanka last cut its policy rates three months ago, ie by 25 bps each. The source said that the Reserve Bank of India cut its key policy rate, ie  its reverse repo rate, the rate at which it lends money to banks on an overnight (o/n) basis by 25 bps to 7.50% on Tuesday.

Sri Lanka’s reverse repo rate is 9.50% while its repo rate, ie the rate at which it pays banks for parking its excess liquidity with it on an o/n basis is 7.50%.

There is a link between interest rates and inflation. Higher the inflation, higher the interest rates and lower the inflation; lower also is interest rates.

This is because a high inflationary regime will induce banks to offer higher interest rates over and above inflation to attract deposits. Similarly in a low inflationary regime banks have the luxury to cut deposit rates.

Deposit rates and lending rates are interconnected. Higher the deposit rates, higher will be the lending rates and vice versa. A high lending rate scenario brings with it its own problems as elaborated on these pages before.

According to state controlled Census and Statistics Department, the year on year change in inflation, as measured by the Colombo Consumers Price Index, increased to 9.8% last month.  Therefore with inflation in the near double digit level, lowering of rates by a policy rate cut may cause inflation to further rise, negating the very purpose of such a cut. However that may be, the source said that with the state entering the foreign exchange market on Tuesday, the ER deteriorated by 40 SLc to Rs. 126/60 against the  $  in interbank spot trading over its previous day’s close due to this “new” buying pressure.

With such buying pressure continuing the following day Wednesday as well, the ER in two way quotes marginally declined to the Rs. 126/55/70 level. And on Thursday, prior to the UNHRC vote on Sri Lanka, which as expected the island lost, the ER depreciated by a further 37 SLc to Rs. 127 due to a combination of state and private sector buying. It’s the middle rate in two way quotes which is generally considered as the rate at which trades are done.

“But it didn’t dip further after UNHRC’s negative vote against Sri Lanka was known,” a source said. The market had had already factored in this negativism prior to the vote count, held later during the day according to Sri Lanka time, he said.

By the end of the week on Friday (March 22), the ER marginally strengthened to the Rs. 126/70/85 levels in two way quotes due to the absence of state buying from the market, after declining to the Rs. 126/90/127/10 levels earlier during the day.

In other developments, the bourse which on Monday’s trading recorded its second lowest turnover figure seen for the year thus far, by returning a sum of Rs. 309.3 million, bounced back the following day to record a Rs. 933.6 million turnover. On Wednesday, turnover declined by nearly a half to Rs. 539.68 million, while improving to Rs. 672.4 million the following day Thursday, “aided and abetted by penny stocks such as “Abans Financials,’ The Finance, Ramboda Falls, Serendib Eng. Grp. and Softlogic Fin”.

The lowest turnover figure the bourse has thus far seen for the year is Rs. 300.1 million, an amount it made on February 22 (see also above).

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