CB cuts reserve requirement to increase liquidity

The Central Bank yesterday cut the statutory reserve requirement for commercial banks by 75 basis points to 9.25 percent to inject cash into the market and help it weather turbulence from the global financial crisis.

The move is effective from Oct. 17 and will help the financial market access an additional 7.5 billion rupees ($69.4 million), the Bank said.

"This step has been taken in order to ... enable the market to effectively face any liquidity constraint that may arise as a result of the ongoing turbulence in the global financial markets," the Bank said.

The Central Bank also decided to relax its restricted reverse repurchase window with effect from Wednesday, increasing access to 10 times per month from the current six for each commercial bank and primary currency dealer.

The changes remain in force until Dec. 31, the Bank said.

"Both measures will improve the market liquidity and bring down the interest rates," Chirantha Caldera, a currency dealer at Commercial Bank of Ceylon, told Reuters.

Although inflation has been easing, rates for treasury bills and bonds have remained high and the bank has been looking for ways to bring them down amid criticism over limited credit access, analysts said. The bank restricted access to the reverse repo window early last year to try to curb demand-driven inflation, after it found banks were taking money from it at 12 percent and profiting by loaning it to the private market at a higher rate.

But the practice did not abate, so the bank in November imposed a penalty rate of 19 percent on any borrower that accessed it more than four times a month. The usual rate is 12 percent. The Bank said despite the increased money supply due to Monday's move, it expects to downwardly revise reserve money targets in the fourth quarter to contain any inflationary effect. Reuters