- CBSL’s liquidity injection efforts pay off as reverse repo declines.
- Sri Lanka’s monetary policy tightening yields positive results.
The total outstanding repurchase auctions (reverse repo) transaction volume of Central Bank of Sri Lanka (CBSL) has come down to Rs. 40 billion by end of June 2024, after starting the year at Rs. 194 billion.
According to the Open Market Operations (OMO) report by CBSL, the Central Bank conducted a reverse repo continuously since mid-April 2023 considering the liquidity deficit in the domestic money market.
By the end of December 2023, total injections through short term and long term reverse repurchase auctions were Rs. 1,450.3 billion and Rs. 1,393.3 billion, respectively.
“Accordingly, at end December 2023, total outstanding reverse repo transaction volume remained at Rs. 194.0 billion,” Central Bank said.
OMOs were conducted aggressively from mid-April 2023 to ensure the availability of adequate liquidity with the view to inducing a downward adjustment in interest rates. Liquidity was provided by the Central Bank on overnight, short term, and long term basis.
Moreover, the Central Bank continuously conducted reverse repurchase auctions on a daily basis during the first quarter of 2024 to inject liquidity to the domestic money market and create certainty on the availability of liquidity among market participants.
However, from early May 2024, liquidity injections through reverse repurchase auctions were scaled down and accordingly, by end June 2024, total outstanding reverse repo amount was Rs. 40 billion.
Liquidity deficit, which remained persistently high during the first half of 2022, improved considerably towards the latter part of 2022. Liquidity levels further improved in 2023 and recorded a surplus of Rs. 120.4 billion by end June 2024.
CBSL said that factors such as maturities of treasury bills holdings of CBSL currency withdrawals by the licensed commercial banks from CBSL and foreign loan repayments of the government resulted in an absorption of liquidity in 2023.
Meanwhile, currency withdrawals, maturities of treasury bills holdings of the Central Bank, and maturities of term reverse repo auctions caused a decline in domestic money market liquidity by end June 2024.