Bond yields up 0.3%, rupee down 75 cents

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By 2018-02-13

By Paneetha Ameresekere

Treasury (T) bill rates fell by 15 basis points (bps) and T Bond rates by 30 bps (0.30 per cent), led by foreign exits from the T Bond market due to the panic caused by the political uncertainty created over former President Mahinda Rajapaksa's SLPP's surprise, sweeping win at Saturday's Local Government polls, market sources told this reporter.
There are reports that the Government is to make an announcement on Thursday. At least until such time, panic will rule the markets, they said.

Adding fuel to the fire, the benchmark 'spot' fell by 70 to 75 cents to Rs 154.90/155 to the US dollar in two way quotes while Central Bank of Sri Lanka (CBSL) printed Rs 582 million and paid out US$ 105.06 million (16,221.97 million) from its foreign reserves yesterday to meet external commitments.,

On the previous working day Friday, the 'spot' had closed stronger at Rs 154.20/25 to the dollar in two way quotes.
In the calendar year to date the 'spot' has fallen by Rs 1.40 (0.91 per cent), having had closed last year at Rs 153.50/60 to the dollar in two way quotes. Further, year-on- year as at yesterday, the market exchange rate has declined steeply by Rs 3.65 (2.41 per cent), having had closed 9 February, 2017 at Rs 151.25/35 to the dollar in two way quotes in two weeks' forwards. Friday, 10 February 2017 was a Poya, bank holiday to the market.

A weak 'spot' causes cost push inflation as Sri Lanka is an import dependent economy.
Yesterday's depletion of foreign reserves was led by CBSL settling some of its' short term swap commitments with domestic Banks. Government of Sri Lanka (GoSL) and CBSL recently gave a commitment to the IMF to downsize their short term swap commitments with domestic Banks.

Conversions are based on the closing price of the middle rate of Thursday's 'spot' value which was Rs 154.40 to the dollar. CBSL deals in 'spot' which settlements take place after two market days from the date of transaction.
As a result of these actions, net excess liquidity (NEL) fell by Rs 15,639.97 million (73.07 per cent) to Rs 5,765.03 million yesterday. Due to money printing (MP), GoSL's MP commitments increased by 11.23 per cent to Rs 5,765.03 million yesterday, thereby, creating demand pull inflationary pressure.

Meanwhile, GoSL's MP borrowing costs (BCs) registered a figure of Rs 256.26 million yesterday. CBSL prints money and lends to GoSL to help the latter to meet its monetary commitments in the absence of adequate revenue. In a similar operation, a year ago on Thursday, 9 February, 2017, the country's foreign reserves were drained by an amount of $ 200.72 million (Rs 30,258.38 million), interpretation of the then open market operations data showed. Friday, 10 February, 2017 was a Poya holiday to the markets.

This haemorrhage was due to a combination of foreign exits from the government securities market (GSM) and/or GoSL's foreign debt servicing commitments and CBSL's swap settlements with domestic banks.
In the week ended Wednesday, 15 February, 2017, the GSM suffered a net foreign outflow (NFO) of $ 117.46 million (Rs 17,707.18 million). Conversions are based on the then administered 'spot' which was Rs 150.75 to the dollar. However, currently, the 'spot' operates in a liberalized environment
Also, to aid GoSL in its monetary commitments in the absence of adequate revenue, CBSL printed Rs 13,502.38 million, thereby increasing its face value (FV) MP liabilities by 6.11 per cent to Rs 234,612.45 million on 9 February, 2017.

Due to the aforesaid drawdown in foreign reserves, NEL, 9 February, 2017 over 8 February, 2017, fell by Rs 16,756 million (65.03 per cent) to Rs 9,010 million. Meanwhile, due to MP, GoSL's MPBCs increased by Rs 61.54 million (0.79 per cent) to Rs 7,881.28 million on 9 February, 2017.

Also a year ago on 9 February, 2017, CBSL's FVMP holdings registered a figure of Rs 234,612.45 million.
The 'spot' at times is controlled to minimize Sri Lanka's rupee debt costs. Usually the Treasury is bereft of dollars unless it has raised dollars by a syndicated loan or by a sovereign bond or by a similar such vehicle. Nonetheless, more often than not, such costs are met from CBSL's foreign reserves after buying the required greenbacks by paying CBSL its rupee value in 'spot' equivalents. Therefore, a weak 'spot' will only inflate GoSL's rupee debt stock. To prevent such a scenario, GoSL exerts moral suasion on the 'spot', like what happened on 9 February, 2017.

The interbank foreign exchange market is avoided to meet GoSL's foreign debt servicing commitments for fear that that would cause depreciative pressure on the rupee.

Further, in an administered 'spot' environment, where, however, the market is allowed the liberty to deal in other tenures to find the true value of the dollar, nonetheless, vis-à-vis foreign transactions in the GSM, such transactions are also dealt in 'spot', as per the arrangement, when GoSL/CBSL, for the first time, partially opened the GSM for foreign investments in 2006.

Otherwise, such foreign investors will not have had come to the market. Therefore, in a controlled 'spot' environment, the required dollars to feed foreign exits from the GSM too, are also bought from the country's/CBSL's foreign reserves after paying for them in 'spot', resulting in the depletion of the country's foreign reserves as well as rupee liquidity from the market.
CBSL is the sole issuer of rupees to the market and sometimes prints money equivalent to the direct holdings of its FV Treasury Bill holdings to aid GoSL to meet its monetary obligations in the absence of adequate revenue. Activities such as those are referred to as MP. But MP may cause demand pull .

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