Policy rates cut by 50 basis points

• Secondary market yields increase subsequent to policy rate decision 
• Foreign buying continues for a second consecutive week 
• Inflation increases

By Wealth Trust Securities

The Central Bank of Sri Lanka (CBSL) commenced relaxing monitory policy at its announcement on 31 May, the first such move since April 2018. The 50 basis points slash saw the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) fall to 7.50% and 8.50% respectively. This led to a drop in overnight call money and repo rates to average 7.94% and 8.07% respectively for Friday while it averaged 8.35% and 8.48% respectively for the week.  

The Open Market Operations (OMO) Department of the CBSL drained out liquidity during the first four days of the week barring Friday as all bids received for the eight day Repo auction of Rs. 35.15 billion was rejected. The total money market liquidity remained high of Rs. 71.23 billion.  

The trading week ending 31 May was topsy-turvy with yields decreasing during the early part of the week and increasing on Friday subsequent to the monitory policy announcement as activity was witnessed across the yield curve. 

The yields of the 2021’s (i.e. 01.05.21, 01.08.21 & 15.10.21), the 2023’s (i.e. 15.05.23 & 15.07.23), 15.03.24, 01.08.26, 15.01.27 and 01.05.29 were seen decreasing to intraweek lows of 9.25%, 9.30%, 9.35%,  9.80%, 9.82%, 9.95%, 10.22%, 10.30% and 10.40% respectively against its previous weeks closing levels of 9.30/45, 9.35/45, 9.35/50, 9.85/00, 9.90/00, 10.00/05, 10.25/33, 10.32/40 and 10.55/63. However, yields bounced back once again to intraweek highs of 9.38%, 9.40%, 9.50%, 9.95%, 9.93%, 10.03%, 10.25%, 10.40% and 10.45% respectively once again. 

The foreign holding in rupee bonds was seen increasing by Rs. 716 million for the week ending 29 May to record its second consecutive week of inflows totalling Rs. 2.82 billion.  

Meantime, the Colombo Consumer Price Index (CCPI) or inflation for the month of May increased for a fifth consecutive month to 5% on its point-to-point, when compared against its previous month’s figures of 4.5% while its annual average increased as well to 4.2% from 4.1%. 

The daily secondary market Treasury bond/bill transacted volume for the first four days of the week averaged Rs. 8.04 billion. 

Rupee closes marginally lower 

In the Forex market, the USD/LKR rate on the spot contracts were seen closing the week marginally lower at Rs. 176.40/50 in comparison to the previous weeks closing levels of Rs. 176.30/45, subsequent to trading within the range of Rs. 175.85 to Rs. 176.70 during the week. 

The daily USD/LKR average traded volume for the first four days of the week stood at $ 116.75 million. 

Given are some forward dollar rates that prevailed in the market: one month – 177.10/30; three months – 178.70/90; six months – 180.80/10.