One-year T-bills now offer higher yield than what banks offer for 12-month FDs

• Divergence could prompt banks to raise deposit rates imminently to stay attractive 

Sri Lanka’s one-year treasury yield widened the gap it had with the similar tenure bank fixed deposit rates, after the Central Bank last week raised the ceiling yield offered on the one-year treasuries, ahead of the weekly auction, a practice which is expected to continue for some time. 

The Central Bank last week raised the ceiling rate for the one-year treasury bill rate by a sharp 55 basis points (bps) to 5.93 percent, after the overnight rate for providing liquidity to the money market, which is often referred to as the Standing Lending Facility Rate (SLFR), was raised by 50 bps to 6.00 percent, a few days earlier. 

The interest offered by a licensed commercial banks for one-year fixed deposits, which was in most cases slightly below the one-year treasury bill rate, grew wider after last week’s ceiling rate announcement, which carried a sharp increase compared to a 5.0 bps increase each in the previous two weeks. 

This will now prompt banks to raise their deposit rates from the current levels to woo more deposits back into the banking sector, with the competition coming from treasury bills, which are considered as a zero-risk investment.
The state-owned People’s Bank had already responded to the policy rate hike last week and perhaps also to the subsequent new treasury bill ceiling, by raising its 12-month fixed deposit rate to 5.5 percent. 

The rate ranged between 4.5 percent and 5.0 percent among licensed commercial banks, according to their corporate websites, although there could be slight variations for a large quantum of deposits and for senior citizens. 

The Central Bank a fortnight ago increased its key policy rates by 50 bps, while raising banks’ mandatory reserve requirement by 200 bps, to address the anomalies that had emerged between the yields of dollar deposits and rupee deposits and to ease the pressure on the foreign exchange market. 

Subsequently, the Central Bank issued an order stipulating 5.0 percent as the maximum rate that can be offered on foreign currency deposits, except for those funds in the special foreign currency deposit accounts, which were introduced last year, to lure in foreign currency to rebuild reserves and to alleviate pressure on foreign currency.
The move is among others aimed at dissuading the practice holding of export earnings in foreign currency accounts. 

Meanwhile, the Central Bank indicated that it would continue the practice of placing yield ceilings on treasury bills for sometime while expecting a gradual increase 
every week. 

“…that we will continue with for some time. Of course, there will be little increase(s) in the rates that are offered weekly,” said Central Bank Governor Prof. W.D. Lakshman, referring to the maximum yield announcements in respect of treasury bill yields. 

 However, a section of the economists say the practice undermines monetary stability and nullifies the effects of the policy rate hike. When the Central Bank rejects bids received above the ceiling rate and then goes on to buy the bills offered utilising the printed money, it creates forex shortages, as has been the case thus far. 

At the treasury bill auction held on August 25, the first one since the key policy rate hike, the Central Bank accepted only a fraction or Rs.200 million of the one-year treasury bills, out of Rs.20.5 billion it issued and received bids for, as the balance may have come in at over the ceiling yield of 5.93 percent.