Sri Lanka's Money Market Interest Rates Rise Amid Surplus Liquidity Decline

Strategic Insights -

The Central Bank of Sri Lanka (CBSL) data indicate a rise in interest rates in the country's money market, driven by an increase in overnight transaction volume and a decline in surplus liquidity. This adjustment, however, is being weakly constrained by the CBSL's "single policy rate." The maximum and average Call Rate has increased to 7.90% from 7.86% last month, while the highest rate in the Repo market rose to 7.95% from 7.91%. The maximum and average Repo rate also increased to 7.92% from 7.88%. Amid robust credit growth, the overnight transaction volume has increased to the Rs. 50-60 billion range from the Rs. 30-40 billion range observed in September.

Key Takeaways:

  • The maximum and average Call Rate has increased to 7.90% from 7.86% last month.
  • The highest rate in the Repo market rose to 7.95% from 7.91% last month.
  • The maximum and average Repo rate also increased to 7.92% from 7.88%.
  • The overnight transaction volume has increased to the Rs. 50-60 billion range from the Rs. 30-40 billion range observed in September.
  • Critics suggest that the "single policy rate" (7.75%) tends to constrain money market participants, allowing imbalances to build.
  • The CBSL is operating a deficit reserve regime, providing overnight funds to banks only at the maximum rate of 8.25%.
  • Analysts warn that suppressing interest rate fluctuations and rigidly targeting a "single policy rate" increases the risk of a secondary sovereign debt default.
  • The Sri Lankan Rupee (LKR) showed weakness in the open market on October 27, weakening against the US Dollar to 303.90/304.00.
  • Analysts are paying close attention to the LKR's continued depreciation despite a record foreign accounts surplus this year.

Statistics:

  • Maximum and average Call Rate: 7.90% (up from 7.86% last month)
  • Highest Repo market rate: 7.95% (up from 7.91% last month)
  • Maximum and average Repo rate: 7.92% (up from 7.88%)
  • Overnight transaction volume: Rs. 50-60 billion (up from Rs. 30-40 billion in September)
  • Credit growth: Robust in recent months
  • CBSL's "single policy rate": 7.75%
  • CBSL's deficit reserve regime rate: 8.25%
  • Sri Lankan Rupee (LKR) exchange rate: 303.90/304.00 (down from 303.70/85 on October 24)

Sources:

  • Hiru News (no date provided)