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The Central Bank of Sri Lanka will implement today the system of open market operations (OMO) using the overnight money market, the bank said.

It gives the Central Bank more control over the reserve money in the financial system as the transactions under the OMO will be conducted at rates of interest determined in the market which are more consistent with the move towards market based instrument of monetary policy, Deputy Governor, Central Bank, W A Wijewardene told the Daily News yesterday.

The volume of liquidity either injected or absorbed under the OMO will be decided by the Central Bank. This would enable the Central Bank to manage the market liquidity more effectively to achieve its monetary policy objectives through the realisation of relevant monetary targets.

Open Market Operations will come into force as an instrument of the monetary policy to regulate the volume of money in the economy in achieving economic and price stability.

"Under the OMO (depending on the requirement of monetary policy), the bank could either inject liquidity to the financial system by purchasing government securities or absorb liquidity from the system by selling its holdings, government securities or its own securities," he said. In line with the Central Bank's policy of moving away from non-market oriented instruments, to market based instruments in implementing monetary policy, the OMO constitutes the main instrument of monetary policy.

With the new system coming into force, the Central bank will offer repurchase and reverse repurchase facilities to commercial banks and primary dealers to absorb liquidity on a short-term basis at an interest rate known as the Repurchase Rate (repo) or to inject liquidity on a short-term basis at the Reverse Purchase (reverse repo).

"At present, these facilities are offered to the participating institutions at interest rates decided by the Central Bank and used by the participating institutions at their own direction.

The main features of the system include the interest rate corridor, daily auction of whether repo or reverse repo to maintain the inter-bank rate stable within the corridor, standing facilities and outright buying/selling of Treasury bills/bonds at the discretion of the Central Bank to either inject or absorb long-term liquidity.

The interest rate corridor specified in terms of the repo rate(lower bound currently at nine percent) and the reserve repo rate(under bound currently at 11 percent) will be announced by the Central Bank.

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