The Central Bank says recent deals including a large cross-trade relating to rupee-denominated bonds have helped lift foreign exchange reserves.
The Central Bank said about $1.2 billion had flowed into the country recently and part of this money was absorbed into foreign exchange reserves.
This intervention also helped stabilise the rupee by preventing a sudden appreciation. On Friday the CB said reserves had reached $3.9 billion with the latest inflows from a new SDR facility from the IMF.
"We bought the dollars and built up our reserves. We intervened in the market to stabilise the rupee, as we have done so many times before," Central Bank Assistant Governor P. N. Weerasinghe, told the Sunday Times yesterday.
Banking sources said the $1.2 billion included a cross-trading transaction with Templeton Finance, a fund manager, which didn't come through the market. The fund had sold $875 million through HSBC, as the custodian bank to CB and was repaid in rupees. Templeton then purchased bonds maturing in 2012-2013 for this amount.
The CB issues both dollar-denominated bonds and rupee-denominated bonds. The latter is a favourite among investors because they bring dollars, convert them to rupees (just like in the case of the Templeton deal) and buy rupee bonds which give a much higher interest.
In the rupee-denominated bonds, the investor is able to reconvert the rupees -- at maturity -- back to dollars. "These bonds are at 12-13% interest, and are settled at the dollar rate at the time it matures," the head of treasury at a local bank said, adding that there had been transactions like this in the past.
Some years back the CB sold rupee-denominated bonds worth $700 million to a few fund managers in similar transactions but more than $500 million of this was suddenly withdrawn in 2008 due to the global financial crisis, triggering a dent in local reserves.
Asked whether this could happen again after the latest (Templeton) transaction, the treasury manager said, "Yes if there is an international crisis and a shortage of funds. However I don't envisage that happening now and even if it does, with $3.9 billion in reserves, that ($875 million) won't lead to any major dent in reserves."
CB officials said earlier this week that the reserves were expected to reach over $4 billion in October.
Dr Weerasinghe said under Sri Lanka's regulations, foreign investors could purchase up to 10% of outstanding T-Bills and T-Bonds offered and the $1.2 billion was within that limit.
He said from the time the market was open to foreign investors, they also had the freedom to withdraw their investments whenever they wanted.
Export Development and Investment Promotion Minister G.L. Peiris also referred to this influx of dollars saying at a post-Cabinet news briefing on August 20 that during the first three days of that week nearly US$ 900 million had been invested in treasury bills and bonds.
"The money we received from Monday to Wednesday during the week was three times the amount received from the IMF and it shows the confidence generated among the investors," he was quoted as saying.