Rates slip

The Public Debt Department of the Central Bank reissued maturing Treasury bills amounting to Rs. 11 billion yesterday for which commercial bank bids amounted to Rs. 29.5 billion of which Rs. 12.2 billion was accepted.

"The banking system continues to be highly liquid with excess rupee positions amounting to Rs. 30 billion on average. With private sector lending slowly picking up due to the absence of quality projects to lend to, banks have no option but invest in government securities," a dealer told The Island Financial Review.

The Treasury bill auction was more than two times oversubscribed with the longer termed bills attracting the bulk of the bids.

The twelve month Treasury bill attracted bids amounting to Rs. 18 billion of which Rs. 6.1 billion was accepted. Its yield came down by 26 basis points from last week to 8.54 percent.

The six month bill lost 0.18 basis points to settle at 8.30 percent after Rs. 4.8 billion was accepted from bids amounting to Rs. 9.06 billion.

"The high demand for longer termed bills was an indication that the banking system expects these rates to remain as they are, or even lower, for the next six to twelve months. The biggest demand was for the twelve month bill and its rate fell the most from last week, but banks were still comfortable with this," a dealer said.

The three month Treasury bill rate fell 0.14 basis points to 7.64 percent from a week ago. It received bids amounting to Rs. 2.4 billion of which Rs. 1.2 billion was accepted.

Several dealers said they expected the Monetary Board of the Central Bank to cut policy rates further from the current 7.25 percent repo and 9.50 percent reverse repo windows.

Analysts, believe, the Central Bank maybe compelled to lower these rates further in order to boost private sector lending, which has recovered slowly at 3.4 percent compared with government borrowings which grew at 32.6 percent by May.

"Banks say they are not getting enough quality projects to lend to, that demand for private sector credit is low while many in the private sector claim they need credit but banks are not lending. The banking system is coming out of a difficult time and is overly cautious in lending.

"The Central Bank has provided the policy direction by reducing policy rates several times since the war ended, because moderate credit growth is necessary to boost the economy. But it has not convinced the banking system and the Central Bank may have to reduce policy rates further," a market analyst said.


source - www.island.lk