Sri Lanka injects liquidity

(LBO) - Sri Lanka's central bank injected 1.25 billion rupees to money markets overnight at 8.25 percent Wednesday resuming reverse repo auctions and capping spiking overnight rates triggered by forex interventions, dealers said. The money was given slightly under the 8.50 percent reverse repo window rate, which sets the ceiling in a policy corridor, where excess money is drained through a 7.00 percent window facility. Last month the Central Bank also started a repo auction to drain excess money at 7.08 percent.

Sri Lanka's overnight rates, which had ranged around the repo rates with excess liquidity amid external inflows, started to move towards the upper band with an expansion in domestic credit which was putting pressure on the balance of payments.

A defence of a dollar peg at around 110 rupees drained liquidity, pushing gilt backed repo rates around 7.45 percent and un-backed call market rates to 8.50 percent Wednesday.

Though markets still have excess liquidity rates rose as banks which do not have exposure limits were unable to borrow from cash plush players.

Overnight repo rates rose above the 12-month Treasuries rate Tuesday, ahead of a bill auction Wednesday. Allowing market rates to move up, can curb credit growth and reduce pressure on the dollar peg, analysts say.