ICRA Lanka in tier monthly economic update says that Call and Repo rates started to move up from mid-March while the call volumes exceeded the previous levels mainly due to substantial decline in excess liquidity by about Rs 70 billion due to forex payments (equivalent to about RS 180 billion drain on money supply) by the CBSL.
“Credit growth in February exceeded our expectations. Reserve money expanded in March recording the strongest year-on-year expansion since April last year,” the report adds.
The expansion is on account of growth in both currency in circulation and deposits held by the commercial banks with the Central Bank. Generally, currency in circulation expands ahead of festive seasons. In addition, manufacturing, plantations, and trading businesses operate above average capacity during March, which may increase their working capital intensity leading to a temporary spike in borrowings. Therefore, we expect a relatively stronger credit expansion in March. T-bill yields, which were already on an upward trajectory, saw further (~13-16 bps) increase. Reserve money expanded recording the strongest year-on-year expansion since April last year. Yields on the near-dated SLISBs plunged (10-20 pps) in March after the market parsed the news on confirmation of USD 1.5 Billion swap with China.
Increasing yields in the US treasury market and weakening rupee dimmed the attractiveness of local treasuries which triggered foreigners to sell over USD 6 million treasuries.
Rupee faced gradual depreciation throughout the month amid selling pressure in the interbank spot market. Inflation rose to 4.1% as a result of broad base increase in both food and non-food inflation.
The CSE continued to remain bearish for the second straight month with market closing with a drop of 4.75%in the ASPI and a drop of 3.93% in the S&P20. PMI for manufacturing recorded the highest index value since June last year indicating stronger recovery in March.
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