Rupee strengthens for second day

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By 2017-08-24

By Paneetha Ameresekere

Foreign investors appeared to be unmoved by the current political imbroglio, reflected by their continued investments in Treasury (T)-Bonds in the government securities market ( GSM, T-Bills and T-Bonds), which resulted in the benchmark 'spot' strengthening for the second consecutive market day yesterday, to close at Rs 152.90/153 to the US dollar in two way quotes, market sources told this newspaper.

The 'spot' over Tuesday's close strengthened by 20 cents. Yesterday's volumes were moderate, they said. Central Bank of Sri Lanka (CBSL) has not been on the buying side of dollars this week, while last week it was offering to buy 'spot' at discounted prices, resulting in only market to market deals being done since last week to date, they said.

CBSL retiring a portion of its T-Bill holdings amounting to a face value (FV) of Rs 5,321 million, resulting in Government of Sri Lanka's (GoSL's) FV money printing (MP) borrowing costs falling by Rs 20.16 million (1.01%) to Rs 1,981.41 million yesterday over Tuesday, interpretation of CBSL's open market operations (OMO) press releases showed, despite rising rates. CBSL's FVMP holdings fell by 4.1% to Rs 126,013.43 million yesterday. Justice Minister Wijeyadasa Rajapakshe's sacking by President Maithripala Sirisena yesterday, resulted in the weighted average yields (WAYs) of T-Bills rising for the second consecutive market week at yesterday's auction, with the WAY of the benchmark one year (364 day) T-Bill increasing by 11 basis points (bps) to 9.65% and that of the six months (182 day) by 10 bps to 9.27% respectively, week on week.

CBSL which administers GoSL's debt ,rejected the Rs 7,950 million worth of offers received for the three month (182 day) maturity yesterday, probably due to the 'higher' yields asked by the market. CBSL issued all Rs 20 billion worth of T-Bills, also, originally billed to be issued at yesterday's auction.

As a result of CBSL retiring some of its T-Bill holdings, net excess liquidity fell by Rs 3,532 million (14.56%) to Rs 20,724 million yesterday. This fall was cushioned due to the market enjoying net foreign inflows (NFIs) of US$ 11.67 million (Rs 1,789 million) yesterday. Conversions are based on Monday's 'spot' rate which sources said was Rs 153.35 to the dollar.
$50.93M NFIs

A year ago on Tuesday, 23 August, 2016, the money market (MM) enjoyed book value (BV) NFIs of $ 50.93 million (Rs 7,405.7 million), interpretation of the then OMO press releases showed. Conversions are based on the then administered value of the benchmark 'spot' which was Rs 145.40 to the dollar or thereabouts.

These BVNFIs may have had been led by exporter conversions. In the two market days to 23 August, 2016, the MM had enjoyed BVNFIs of $ 103.74 million.

As a result of this BVNFI, BV of the MM's net shortfall (NS) decreased by Rs 7,455.93 million (43.03%) to Rs 9,872.18 million and its FV NS by Rs 7,457 million (43.02%) to Rs 9,875 million as at 23 August, 2016 over its previous day 22 August, 2016 figures, data showed. The MM then was net short for the thirty fourth consecutive market day.

Further, BVMP, 23 August, 2016 over 22 August, 2016 increased by Rs 50.23 million (0.02%) to Rs 205,275.71million.
FV MP and BVMP are CBSL's direct holdings of T-Bills, inclusive of borrowing costs of GoSL's due to CBSL because of MP and the value of CBSL's direct holdings of T-Bills, excluding borrowing costs of GoSL's owed to CBSL because of MP, respectively.
CBSL is the sole issuer of new rupees to the market. In the absence of adequate revenue, CBSL prints money and lends to GoSL to meet its monetary commitments. But MP may cause demand side inflationary pressure on the economy, whilst increasing GoSL's debt.

MM's shortfalls were generally met from CBSL's standing lending facility and reverse repo windows during this period.
Previously, CBSL only showed the BV of its T-Bills in its OMO releases. It was only after the appointment of Dr. Indrajit Coomaraswamy as CBSL Governor last July that the FV of such data was also shown, subsequently.
CBSL deals in 'spot.' 'Spot' trades are settled after two market days from the date of transaction.

If, in the event, foreign investments in the GSM lead to the conversion of such dollars to rupees by selling the same to CBSL, while the country's foreign reserves are uplifted by an equivalent amount as a reaction to this, the commensurate amount in rupees is also released to the MM.

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