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SL excessive market interest rates begin to adjust downward

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Excessive market interest rates have begun to adjust downward and are expected to ease further in the period ahead, central bank announced today  

Early signs of a gradual easing of excessive market interest rates have been observed recently in response to the administrative measures adopted by the Central Bank, along with the improvements in domestic money market liquidity and overall sentiments in the domestic markets. 

Recent measures adopted by the Central Bank to reduce the overreliance of licensed commercial banks on the standing facilities of the Central Bank and the concurrent conduct of open market operations helped improve liquidity in the domestic money market. 

This prompted activity in the interbank money market. Improved liquidity conditions, along with improved investor sentiment on the anticipation of “financing assurances” from official creditors, led to a notable moderation in the yields on government securities recently, reflecting the easing of the high risk premia attached to government securities. 

Meanwhile, the market deposit rates have also shown a notable moderation, benefiting from improved liquidity conditions. 

These developments are expected to pave the way for an easing of excessive market interest rates in the period ahead. 

Nevertheless, outstanding credit extended to the private sector by commercial banks continued to contract in response to the tight monetary conditions and the moderation in economic activity. 

Monetary expansion also moderated from peak levels, albeit at a slower pace.

Overnight liquidity in the interbank market narrowed its deficit significantly and at times turned positive after the Central Bank announced limits on access to its standing facility windows from the middle of this month. 

The data on how the overnight money market liquidity behaved in the past month showed it had seesawed between surpluses and deficits, especially since the Central Bank announcement on January 3. 

For instance, the Rs.230.25 billion liquidity shortage that stood at the start of 2023 came down to around Rs.200 billion in the first week of January before turning a positive Rs.57.43 billion in the following week. 

Thereafter, the positive liquidity expanded to Rs.156.87 billion on January 17, the first day the directive came into effect. The overnight liquidity settled at a positive Rs.136.91 billion by end of last week, the first week since the restrictions came into effect. 

This flip to surplus was a result of banks depositing a huge Rs.316.65 billion under the Standing Deposit Facility (SDF) window from just under Rs.30 billion the day before due to access limitations.     

As access to the SDF facility was limited to five times a month, banks now wait till Friday to deposit their excess liquidity under this window to make the most return as they get paid interest for 3 days till Monday at 14.5 percent. 

This pattern of waiting till Friday or until a day before a market holiday by banks could become the norm hereafter due to the limited access they have to the overnight window to generate returns out of their excess liquidity. 

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