Sri Lanka rupee extend gains against greenbacks in one week forwards

The rupee fell steeply partly due to a so-called one sided ‘DCM’ rule amid money printing.

When large volumes of money are printed, the rupee’s peg to the US dollar will break unless it is defended with reserve sales.

Last Friday excess liquidity in money markets dropped to 137 billion rupees from 164 billion rupees, or about 13 percent of the monetary base, with all banks chocked to the gills with excess liquidity.

Sri Lanka’s central bank is targeting a call money rate at 6.45 percent.

Since targeting-call-money-rate-with-excess-liquidity began the monetary authority has lost control of the reserve money, analysts point out, leading to monetary instability.

Combined with the one sided ‘DCM’ rule where no intervention is made when the rupee falls, but heavy interventions are made when it appreciates, the excess liquidty leads to collapses of the exchange peg even when private credit is weak analysts have said.

On Thursday at least one bank borrowed at 7.0 percent from the overnight window.

On Monday May 04, short banks borrowed 17.73 billion from the window at 7.0 percent while plus banks deposited 163 billion in excess cash at the central bank.

Amid uncertainty in money markets, money printing and downgrades, interbank lending has reduced with counterparty risk perceptions rising.

Liquidity in the overnight money market was 137.56 billion rupees on Monday.

Banks deposited 163.29 billion rupees in Central bank’s excess liquidity window.

In the secondary bond market yields were flat in moderate trading, dealers said with liquidity centered on 2024 maturities.

A bond maturing on 15.12.2021 closed at 7.30/45 percent up from 7.25/30 percent on Thursday.

A 2-year bond maturing on 01.10.2022 closed at 8.00/8.05 percent flat from Thursday.

A bond maturing on 01.09.2023 closed at 8.30/40 percent up from 8.25/40 percent.

A bond maturing on 15.09.2024 closed at 8.70/75 percent on Monday up from 8.65/75 percent Thursday.

A bond maturing on 15.10.2027 closed at 9.00/9.05 up from 8.95/05 on Thursday. (Colombo/May04/2020)