With the US and Japanese economies driving down their interest rates by printing money, and the European Central Bank to lesser extent, sending speculators and their hot capital in to other markets, lowering interest rates would make Sri Lanka less attractive to speculators who could destabilise the economy and also help industrialists reduce production costs, which could offset any losses exporters would face from an appreciating rupee.
Dealers said the domestic market was in panic mode a day after the Central Bank reduced monetary policy rates, as banks awash with excess liquidity still preferred to invest in government securities in the absence of viable private sector projects to lend to.
The auction of Rs. 11 billion worth of maturing Treasury bills yesterday (12) saw rates slip after weeks of stagnation. The auction attracted bids amounting to Rs. 37.72 billion.
The three-month bill attracted bids amounting to Rs. 8.45 billion of which Rs. 3.5 billion was accepted, its yield falling 17 basis points to 7.07 percent from 7.24 percent the previous week.
The six-month bill saw its yield fall by 26 basis points to 7.07 percent from 7.33 percent a week ago after attracting bids amounting to Rs. 13.9 billion of which Rs. 2.5 billion was accepted by the Public Debt Department of the Central Bank.
The 12-month bill attracted bids amounting to 15.36 billion of which Rs. 5 billion was accepted. It yield fell 22 basis points to 7.33 percent from 7.55 percent a week ago.
The amounts offered at the auction were Rs. 3.5 billon for the three-month bill, Rs. 2.5 billion for the six-month bill and Rs. 5 billion for the 12-month bill.
The Central Bank cut policy rates the day before. The repurchase rate was cut by 25 basis points to 7 percent and the reverse repurchase rate by 50 basis points to 8.50 percent. The repurchase rate applies to overnight deposits of the banking system with the Central Bank while the reverse repurchase rate applied to overnight borrowings of the banking sector from monetary authority.
"The market was on panic mode at the Treasury bill auction on speculation that the Central Bank would cut policy rates further. Banks are holding on to excessive rupee balances, and in the absence of viable and attractive private sector projects to invest in, these banks prefer to invest in government securities, so any speculation that rates would be reduced puts them in panic mode," a dealer said.
"However, we believe that this would be the lowest policy rates would be brought down to for the moment," he said speaking to The Island Financial Review.
Earlier this month, Central Bank Governor Ajith Nivard Cabraal said interest margins of the banking system (the difference between lending rates and deposit rates) averaging at 4.5 percent, could be lowered to around 3.5 percent to 4 percent by end 2011, given the stability in interest rates. This has caused some concern to the banks which are bracing for further policy rate cuts.
By November 2010, year-on-year growth in credit granted to the private sector by commercial banks grew by 23 percent, from a 6 percent decline the previous year, an indication that there was lot more room for credit growth, but banks say there is no demand.
On the other hand, some big businesses have gained from the low interest rates and are not in need of financing. Others are finding that a public offering was the cheapest option to raising shares.
Dealers said low interest rates would discourage speculators from dumping their ‘destabilising’ hot capital in the Sri Lankan economy.
"The US and Japanese authorities are printing so much money, and the European Central Bank is also keeping its (money) printing press open. This is driving down interest rates in those regions and driving speculators in to other emerging economies. Brazil has said it would take action to discourage this trend hurting its currency. For us in Sri Lanka, low interest rates would help, at a time such as now, when speculators are on the prowl," a dealer said.
Interest rates too high...
Speaking to The Island Financial Review, Deputy Governor of the Central Bank Dharma Dheerasinghe said Sri Lanka’s interest rates were an anomaly.
"Our interest rates are too high. I am not comparing are rates to rates in the US, London, Tokyo or Singapore for that matter (which are much lower), but compared to emerging economies such as India, Thailand, Vietnam and Bangladesh, countries we compete with for exports, our rates are a little too high.
"In the long term, we would have to bring our interest rates down in order to be competitive and this would also help bring domestic production costs down which translates to lower prices and industrial peace," he said.
But, Dheerasinghe said low interest rates would have an important implication.
"We are mindful of the global trends in speculative hot money flow. Emerging economies such as China, India, Brazil, South Africa, Philippines, Indonesia and Thailand are all attracting speculative investors. We being a small emerging economy have attracted speculators as well, and this is one reason why we are maintaining the cap on foreign investments in government securities at 10 percent.
"Hot money is a big problem and could destabilise the economy if investors withdraw and we are mindful of this, and this is why the Central Bank would be looking at low interest rates in the long term as well.
"We need to attract long term investments, such as FDIs. They will come in not because interest rates are high, but because the economy is growing. We will see some of these investments materialise over the next few months," Dheerasinghe said.
source - www.island.lk
No comments:
Post a Comment