ECONOMYNEXT – The Sri Lankan Rupee crossed 231 per US dollar in the over-the-counter market for importers and exporters, while 127 billion rupees was injected at the overnight print rate of 6.0% for banks to respond (sterilize) to an increase in deposit margin.
Sri Lanka raised the reserve requirement ratio, a margin the bank is to maintain with the central bank from 2.0% to 4.0% as of September 1, but the interbank market was already short despite previous injections.
The central bank had lifted convertibility for most business transactions, weakening the rupee.
There is no longer an interbank cash market to establish a uniform and transparent compensation price for the dollar rupee exchange rate and exporters and importers “buy” dollars in an informal over-the-counter market leading to an over-the-counter rate. almost floating.
Importers call exporters, CEOs and CFOs directly to persuade them to sell at different rates, while those dollars move away from their usual banks to sell dollars.
Some finance officials who did not get the same price as another exporter were criticized for allegedly selling at a lower rate, market participants said. Finance executives don’t like receiving calls, but find it increasingly difficult not to.
On Wednesday, the rupee broke through 231, a psychological level.
“It’s a kind of floating rate since convertibility has been mostly lifted,” said EN economics columnist Bellwether.
“However, liquidity still comes from failed bond auctions and some interventions are underway, which are also sterilized with new liquidity preventing rates from rising, so the rate does not stabilize.”
The day before the SRR took effect, the market was short by Rs 41 billion, usually due to the convertibility offered by the monetary authority (dollars sold) and Rs 150 billion had already been printed in the window 6.0% overnight.
After the SRR hike, an additional Rs 127 billion was printed through the night window to “sterilize” the SRR hike.
Meanwhile, a better-run bank that was over cash and had deposited 109 billion rupees into the central bank’s surplus window reduced its holdings to 72 billion rupees to cope with the rising SRR.
The overnight money rate hit the policy cap of 6.0% on September 1, amid a cash crunch. Call rates last reached 6.0% in May 2011.
Sri Lanka’s bond markets, however, are still dysfunctional with price controls preventing the sale of the tickets offered.
An August 25 ticket auction and a September 2 auction, which failed to sell all titles, led to the printing of money.
Sri Lanka prints Rs 17.6 billion after dysfunctional bill, bond auction, sugar seizure
However, the market was already short of Rs 41 billion as of September 31, before the SRR hike.
Today, over-trading banks are short of Rs 277 billion in total, which could further discourage bond purchases, analysts say.
It is not known why the authorities raised the SRR before the bond auctions started working again.
Bond auctions were frozen on Wednesday with no trading or regular listing, brokers said.
A solitary bond of 12.1.24 was briefly listed at 8.05 / 20 percent on September 1, down from around 08.05 / 15 percent the day before.
Sri Lanka’s economic controls are intensifying as currency shortages worsen amid dysfunctional bond auctions. Unsold bonds are converted into reserve currency and paid as wages to government employees and to cover other expenses, triggering imports by their recipients.
Analysts say getting bond auctions to work is vital. There is now a net cash shortage of $ 205 billion sterilized overnight.
The US Federal Reserve is also triggering a global commodities boom by buying bonds in a so-called Powell bubble. In 1951, however, Fed Governor Marriner Eccles ended a bubble by gaining Treasury independence and saving the Bretton Woods soft-peg system from early collapse.
“You only protect public credit by maintaining confidence in government and in its securities and to the extent that the public will buy and hold those securities,” Eccles said in 1951.
“The thing we are doing is enabling the public to convert government securities into cash and increase the money supply of this country by $ 7 billion in six months.
“We are almost solely responsible for this inflation… the whole issue of rationing and price control is due to the fact that we have this monetary inflation, and this committee is the only agency in existence that can curb and stop the growth of the currency. “
On September 1, authorities said the sugar stocks of five private companies had been seized for “hoarding” and would be sold to consumers under price controls.
Similar claims were made in the 1970s when price controls created shortages when the central bank was the main buyer of government bonds leading to a “controlled economy.” (Colombo / Sept02 / 2021)