Central Bank reduces the Statutory Reserve Requirement

(October 14, Colombo, Sri Lanka Guardian) As a move to release liquidity to the market, the Central Bank of Sri Lanka has decided to reduce the Statutory Reserve Requirement (SRR) on all rupee deposit liabilities of commercial banks by 75 basis points to 9.25 per cent effective from the next Reserve Week commencing 17 October, 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.

As a result of this move, the financial market will be able to access additional liquidity of around Rs. 7.5 billion. 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 15 October 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 6 times.

The above two measures, which would be in force until 31st December 2008, are being introduced 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 of Sri Lanka 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. - Sri Lanka Guardian