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Reduction
in Statutory Reserve Requirement
CB
to pump Rs. 7.5 b into financial markets
In
what could be the Sri Lankan version of helping financial
markets, the reduction in Statutory Reserve Requirement (SRR)
by the Central Bank from next week will free an estimated
Rs. 7.5 billion in additional liquidity in the money market.
The Bank said on Monday that as a move to relaease liquidity
to the market, it has decided to reduce the SRR on all rupee
deposit liabilities of commercial banks by 75 basis points
to 9.25%, effective from the next Reserve Week commencing
October 17, 2008. “This step has been taken in order
to inject more liquidity to the domestic financial market
so as to enable the market to effectively face any liquidity
constraint that may arise as a result of the on-going turbulence
in the global financial markets,” the Bank said.
“As a result of this move, the financial market will
be able to access additional liquidity of around Rs. 7.5 billion,”
it added.
To
strengthen this move, the Central Bank has also decided to
further relax the access of commercial banks and Primary dealers
to its reverse repo facility with effect from October 15,
2008, by providing liquidity, when the market is short, at
its reverse repurchase rate for a maximum of 10 times per
calendar month, up from the current six times.
These two measures, which would be in force until December
31, 2008, are being introduced by the Bank as a necessary
precautionary intervention in the face of the extraordinary
adverse developments in the global financial markets.
Further, while the reduction in SRR would result in an increase
in the money multiplier, its impact on money supply would
be neutralised by an appropriate downward revision in the
reserve money targets set for the fourth quarter of 2008.
Accordingly, the tight monetary policy stance of the Central
Bank would continue until the inflationary pressures ease.
The Central Bank said it will continuously monitor the developments
in the global financial markets and the resultant possible
impact on the domestic money markets and the financial system,
so as to be ready to promptly respond to any new emerging
situation.
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