Rupee weakens after liquidity injections; spot market trades halted

Economynext: Moral suasion returned to Sri Lanka’s forex markets Tuesday with trading in the spot market halted by authorities with no trades allowed above 145.90 to the US dollar dealers said as the rupee weakened in the wake of heavy liquidity injections.

The rupee weakened to 146.20/25 in spot next-next deals, where settlement is made four days ahead, implying that the indicative spot is 146.10/20 to the US dollar, dealers said. In the spot market settlement is made two days later. 

Sri Lanka central bank bought dollars, but from August 29 allowed excess liquidity to build up, effectively letting the foot of the monetary accelerator to boost credit and stop collecting foreign reserves.
Excess liquidity rose to Rs.20 billion by August 31 as he central bank engaged in unsterilized forex purchases without attempting keep the reserves by sterilizing the rupees. On subsequent days the liquidity disappeared. By September 19, a liquidity shortage rose to Rs.48 billion rupees, up from Rs.31 billion. Liquidity goes short when the Central Bank sells dollars to when excess liquidity turns to imports or foreign loan repayments are made.

Injecting liquidity (printing money) on an overnight basis rather than giving accommodating credit with outright purchases of Treasury bills makes banks search for deposits, which cuts consumption.
Sri Lanka’s Central Bank generates balance of payments by purchasing Treasury bills outright either to finance the budget deficit or to sterilize forex sales.

On Wednesday the Central Bank injected Rs.43 billion at 8.49 percent overnight, down from Rs.50 billion on Tuesday. On Tuesday the Treasury bill stock of the Central Bank rose to Rs.226 billion, up from Rs.207 billion on Monday.