Call Rates Hit 10% Due To Liquidity Crisis
Posted on the June 10th, 2012 under News by The Sunday Leader 
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With market’s excess liquidity diminishing, call rates after a lapse of about a month hit the 10% rate at Tuesday’s* trading (see also this publication’s last week’s business pages), while retreating by a mere two basis points (bps) to 9.98% the following day Wednesday, despite a surge in the market’s excess liquidity by Rs. 4,001 million to Rs. 21,865 million over that of the previous day Tuesday’s figure. Call rates remained at 9.98% on Thursday as well, before edging up to 9.99%by the weekend.
However that may be, overnight market repurchase transactions which are backed by gilt edged Treasury Bills, edged up by one bp to 9% (weighted average rate), after holding on to the 8.99% level the two previous market days, ie on Tuesday and on June 1, Central Bank of Sri Lanka (CBSL) data also showed. That rate too remained at 9% on Thursday and contined up to Friday as well. The probable reason for the excess liquidity in the market may be due to inflows received, but the recipients of such inflows preferring to invest such excess in CBSL’s repo window and repo auction, rather than in the market, therewith causing pressure on rates to remain, as this benefit of excess liquidity has not been passed on to the market. “Despite Wednesday’s Rs. four billion inflow, liquidity continues to remain tight,” a market source told this newspaper.
Meanwhile call rates last hit the 10% mark on May 4, recording a weighted average rate (WAR) of 10.22% before finally coming down to as low as 9.69% then after the subscription of state owned Bank of Ceylon’s (BoC’s) US$ ($) 500 million bond issue, thereby flushing the market by an almost equivalent amount of rupee liquidity, before again climbing up with excess liquidity if any in the banking system being entrapped between BoC and foreign banks, but with the rest of the system being short, thereby being compelled to borrow from the market to fulfil their liquidity needs, hence pressure on rates.
Market’s excess liquidity took a kidney punch when in the last four Treasury (T) Bill auctions, weighted average yields (WAYs) in the shorter tenure 91 day (three month) T Bill came crashing down due to interest shown on it, initially led by BoC with foreign banks following.
As a result, T Bill yields for this tenure have fallen by 125 basis points (bps) to 10.86% thus far.
But with inflation creeping up due to recent price increases, these declines however have had not percolated down to at least the one year (364 day) tenure, with its yield having had gone up by 16 bps to 12.66% in the review period.
However that may be, the WAY of the remaining 182 day (six month) T Bill, which, before Wednesday’s auction had had come down only marginally by three bps to 12.29%, came down steeply by 17 bps to 12.12% at Wednesday’s auction, complementing the reaction to the demand for such a tenure in the secondary market, where its yield since Wednesday had had come down to 12.1%.
The interest in the shorter tenure T Bill is because its yield, originally led by interest on it by BoC, having had started to come down, with the market preferring to park its excess on the 91 day which currently fetches a yield of 10.86%, rather than CBSL’s repo rate which comparatively earns a lower interest rate of 7.75%.
Market’s excess liquidity which at the time of the subscription of the BoC bond issue which peaked at Rs. 36,490 million (ie on May 8), has, within a space of under a month, come down to under half of that amount to Rs. 17,864 million by Monday. (See also this publication’s last week’s business pages)
*Monday was a holiday for the local markets on account of poya.
Liquidity Down 75%
The excess liquidity in the island’s banking system which was Rs. 18,806 million on Thursday dropped sharply by 75.3% to Rs. 4,641 million the following day Friday, which a source attributed to the possibility of the Government buying US dollars from the Central Bank (reserves) in order to meet foreign debt service commitments.
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Call Rates Hit 10% Due To Liquidity Crisis
