Sri Lanka’s Central Bank (CB) has resorted to foreign exchange SWAPs from this month to absorb excess rupee liquidity in the domestic market.
“Through these measures, the Central Bank will continue to manage the excess liquidity situation in the domestic market and take appropriate measures to reduce the level of excess liquidity to a more desirable level,” according to a bank statement.
It said that with the retirement of a significant proportion of the CB’s holdings of government securities in August 2009, the bank has resorted to issuing Central Bank securities since October 2009 and foreign exchange SWAPs since November 2009 to absorb the excess rupee liquidity in the domestic market.
On Tuesday, the Monetary Board decided to reduce the Repurchase rate by 50 basis points and the Reverse Repurchase rate by 75 basis points with immediate effect. Accordingly, the Repurchase rate and the Reverse Repurchase rate of the Central Bank would be 7.50 % and 9.75 %, respectively, the statement added.
Inflation, as measured by the year-on-year change in the Colombo Consumers’ Price Index (base=2002), has remained around 1 % thus far during the second half of the year. According to current projections, although inflation is expected to rise moderately in 2010 due to the gradual decline of the base effect of low inflation in 2009, it is expected to remain relatively subdued.