Overnight liquidity turns positive as standing facility restrictions go into effect

Overnight liquidity in the interbank market narrowed its deficit significantly and at times turned positive after the Central Bank announced limits on access to its standing facility windows from the middle of this month. 

The data on how the overnight money market liquidity behaved in the past month showed it had seesawed between surpluses and deficits, specially since the Central Bank announcement on January 3. 

For instance, the Rs.230.25 billion liquidity shortage that stood at the start of 2023 came down to around Rs.200 billion in the first week of January before turning a positive Rs.57.43 billion in the following week. 

Thereafter, the positive liquidity expanded to Rs.156.87 billion on January 17, the first day the directive came into effect. The overnight liquidity settled at a positive Rs.136.91 billion by end of last week, the first week since the restrictions came into effect. 

This flip to surplus was a result of banks depositing a huge Rs.316.65 billion under the Standing Deposit Facility (SDF) window from just under Rs.30 billion the day before due to access limitations.     

As access to the SDF facility was limited to five times a month, banks now wait till Friday to deposit their excess liquidity under this window to make the most return as they get paid interest for 3 days till Monday at 14.5 percent. 

This pattern of waiting till Friday or until a day before a market holiday by banks could become the norm hereafter due to the limited access they have to the overnight window to generate returns out of their excess liquidity.  

The Central Bank limited licensed commercial banks’ access to the SDF window to five times a month and restricted the access to Standing Lending Facility window up to 90 percent of the Statutory reserve requirement of each bank on any given day, effective from January 16. 

The intention was to reduce the overdependence of banks on the overnight facility windows and thereby support the reactivation of the domestic money market, which remained inactive for the last few months. 
This would in turn exert downward pressure on deposits and short-term lending rates which according to Central Bank officials had reached excessively high levels relative to the policy rates.

Leading up to the restrictions which became effective last week, there were concerns raised by some analysts of their implementation as the local units of foreign banks which operate with excess liquidity would not be willing to directly lend to domestic banks given their stricter counterparty limits.  

CT CLSA Securities estimated these local units of foreign lenders had roughly Rs.200 billion worth surplus funds.

Sri Lanka’s overnight money market liquidity deficit hit a peak level of nearly Rs.700 billion by late April last year during the initial days of the economic crisis, before coming down to around Rs.200 billion by the end of last year.