Market expects policy rates to be unchanged


The fall in Government of Sri Lanka’s (GoSL’s) at least theoretical money printing borrowing costs (MPBCs) virtually kept pace with the decline in its face value (FV) MP debt on Friday (16 September), an indication that the market expects the Monetary Board to keep Central Bank of Sri Lanka’s (CBSL’s) policy rates unchanged at  its 5 October meet.

Consequently GoSL’s MPBCs declined by 1.59 per cent (Rs 2,672.08 million) to Rs 165,629.06 million; almost in tandem with the decrease in its FVMP debt, which fell by 1.54 per cent (Rs 51,027.87 million) to Rs 3,263,376.82 million (Rs 3.3263 trillion), thereby marginally defraying demand-pull inflationary pressure as well.

 Liquidity was uplifted by Rs 31,654.87 million (US$ 87.34 million) on Friday led by the settlement of transactions between the GoSL and CBSL. Conversions are based on the benchmark, albeit administered ‘spot’ value of Rs 362.45 to the US dollar as at Wednesday (14 September).

The market was short for a record 253 market days to Friday, with this shortfall  increasing  by 3.61 per cent (Rs 19,373 million) to Rs 556,582 million, thereby causing  sustained rate pressure. Meanwhile, GoSL’s highest to the 256th highest FVMP debt has been recorded in the 256 consecutive market days to Friday. GoSL’s FVMP debt has been over Rs three trillion for a record consecutive 51 market days to Friday.

 Transactions between CBSL and GoSL are foreign reserves neutral and CBSL which administers daily open market operations; lacks transparency. GoSL’s FVMP debt is equivalent to the totality of CBSL’s T Bill and T Bond holdings. MP is the exclusive right of CBSL.  GoSL’s MPBCs are prorated to the outcome in secondary market trading of T Bills and T Bonds on the reference day.

‘Spot’ trades are settled after two market days from the date of transaction. CBSL, the steward of GoSL debt and its foreign reserves deals in ‘spot’. The ‘spot’ is administered to minimise GoSL’s foreign debt in rupee terms and lower the cost of ‘essential’ imports, while ‘essential’ imports are met from the country’s foreign reserves and not from the market, to prevent further depreciative pressure on the rupee as
Sri Lanka is an import dependent economy. 

By Paneetha Ameresekere