CB resumes repo auction after two-year lapse

Reuters: Sri Lanka’s Central Bank on Monday started repo auctions after a lapse of two years, a move that currency dealers see as aimed at easing pressure on the exchange rate and the Central Bank’s dollar sales.

The Central Bank in the past has used the tool under its open market operation to drain money from the banking system to keep the short term interest rate in check, while keeping monetary policy rates unchanged.

The bank stopped open market operations in October 2009. “We stopped it... as there was some aberration in the interest rate structure at that time and short term treasury bill interest rates at certain auctions were below the repo rate,” K.D. Ranasinghe, the Central Bank’s Chief Economist, told Reuters.

On Monday, the Central Bank offered Rs. 39 billion at the auction, but accepted only Rs. 129 million at 7.08 per cent after receiving bids worth Rs. 36.16 billion.

The Central Bank’s move comes after the International Monetary Fund (IMF) on 7 September asked the bank to limit intervention in the foreign exchange market and allow flexibility in the rupee exchange rate.

The Central Bank had continuously said it had intervened in the foreign exchange market to maintain stability of the rupee when it fluctuated sharply either side.

Currency dealers said the move could help the Central Bank to reduce the pressure on the exchange rate.

“I think this is to increase the short term interest rate through draining the liquidity,” said a currency dealer on condition of anonymity. “So when the lending rate goes up, exporters will sell the dollars and the Central Bank will have to sell less dollars.”

On Friday, the Central Bank kept policy rates unchanged for an eighth straight month, saying a favourable outlook for domestic economic activity, a stable rupee exchange rate and improved domestic food supplies should keep inflation moderate.