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CBSL Attempts To Tame Inflation

  • T-Bill Holdings Come Down By 18.1%

By Paneetha Ameresekere

Central Bank of Sri Lanka’s (CBSL’s) Treasury (T) Bill holdings which on a gross basis was Rs. 146,575 million last Friday (April 19), has since come down by Rs. 26,487.78 million (18.1%) to Rs. 120,087.22 million by  the week end (April 26), data showed.
A decline in CBSL’s T Bill holdings indicates that an equivalent amount of rupees has had been taken out from the market to CBSL’s godowns, thereby curbing inflationary pressure in the market to a certain extent.

Money market’s excess liquidity which was Rs. 24,272 million last Friday (April 19), increased to Rs. 26,862 million by Monday, possibly due to CBSL buying foreign inflows from the market and releasing rupees in lieu.

CBSL’s T Bill holdings during this one market day period, on a gross basis reduced from Rs. 146,575 million to Rs. 142,059.58 million; giving an indication that CBSL has had in fact retired maturing T Bills and had not made any new purchases or repurchases of the same.
The following day Tuesday this was further reduced to Rs. 136,128.82 million, whilst contracting on a gross basis to Rs. 133,807.83 million by Wednesday.

Thursday was a holiday for the market on account of Poya.

Market’s excess liquidity contracted from Rs. 24,272 million on Monday to Rs. 22,693 million on Tuesday, indicating a submarket operation, where the government to settle an external commitment, such as an oil bill, though borrowing the necessary rupees from the market to make the required foreign exchange (forex) purchase, ends up making those purchases at an undisclosed price from CBSL’s forex reserves, rather than buying the same from the market.This is done to prevent any volatility in the forex market, which, however, is not the case.

This was also repeated on Friday, where though market’s excess liquidity on the previous market day Wednesday increased to Rs. 32,145 million; and in the absence of CBSL buying T Bills as the events above show, this increase may be attributed to CBSL buying inflows from the market instead, and flooding the same with rupees in exchange, whereas on April 26 market’s excess liquidity declined sharply to Rs. 24,026 million due to a submarket operation described above.

Govt. Securities

Meanwhile the expected policy rate cut at the April 16 monetary policy review disclosure becoming a non-event and “by having such a cut postponed”, led to sluggish trading in the T Bond and T Bill market since, with the market adopting a wait and see attitude for the next couple of months due to the authorities indicating of such a rate cut in the future.

The new electricity tariff increase and its impact on inflation and rates would be felt only next month. A source alleged that the Government by tinkering will anyway keep inflation under double digits.

Last month, according to state controlled Census and Statistics Department, the year on year increase in inflation, as measured by the Colombo Consumers’ Price Index, on a month on month basis fell by 230 bps, ie from 9.8% to 7.5%. Higher the inflation, higher will also be the rates, in an effort by banks to lure investors to part with their money by offering them a better return over inflation.

Yields

Monday’s interest in the government securities market mainly revolved round T Bills of a year’s maturity in secondary market trading. They were being traded at the 11.25/30% price in two way quotes in thin trading, the source said.

At the previous week’s T Bill auction, this tenure saw its weighted average yield (WAY) marginally contract by one basis point to 11.34%, over the WAY fetched at the preceding auction.

Last Friday (April 19) this tenure was trading at a price of 11.28/35% in two way quotes, he said.

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