Rates should ease despite domestic debt restructuring fears: Central Bank chief

• Says such uncertainty has already priced in and hence other factors should weigh down on rates 

The Central Bank chief last week said that the prevailing uncertainty over domestic debt restructuring had already priced into the government securities yields and thereby the market rates and thus it should not be the single factor preventing the downward adjustment expected in both the yields and the rates.

The Central Bank last week said the current deposit rates and short-term lending rates are excessively high and thus have room to fall even before cutting the policy rates as inflation is easing while the deficit in the money market liquidity has sharply narrowed. 
“The uncertainty factor has already been priced in, in the Treasury yields by the market. But, other factors such as the improvement in interbank liquidity and inflation are turning around. 

I am sure the investors will take into account all the factors, not necessarily one factor in their pricing,”said the Central Bank Governor Dr. Nandalal Weerasinghe in response to a question whether uncertainty over the rupee debt restructuring would prevent rates from adjusting downward as desired by the officials.  
“We have already seen the yields stabilising in the auctions held last couple of weeks. I am sure that will continue going forward,” he added. 

At the post monetary policy press conference held last Thursday, Dr. Weerasinghe remained tightlipped on queries over if the domestic debt would become subject to restructuring along with the foreign currency debt, as the matter is too price-sensitive. A day later, State Finance Minister Shehan Semasinghe however ruled it out as he was quoted to have reiterated that the government has no intention to take a haircut on domestic debt. 
In any case, some have pointed out that even before a formal haircut came in, domestic debt had already taken a haircut on its value with the rupee falling from 200 a dollar to 360 a dollar. 

However, there were reports raising concerns over the matter which said that the creditors holding Sri Lanka’s foreign currency debt would demand restructuring of domestic debt as part of the deal to agree on restructuring Sri Lanka’s debt they hold. 
Such a development would bring in some unfavourable outcomes such as eroding banks’ capital, possibly leading the government to infuse fresh capital to banks which would in turn erode the net benefits of such a restructuring, Fitch Ratings said.