Sri Lanka, India in Mutual Forex Reserve Investment Pact…

Central Bank of Sri Lanka and the Reserve Bank of India has inked a deal to buy up to 500 million dollars worth of securities in each other’s governments, in a bid to diversify reserve assets.

Central Bank of Sri Lanka and the Reserve Bank of India has inked a deal to buy up to 500 million dollars worth of securities in each other’s governments, in a bid to diversify reserve assets. “As a result, the CBSL could now access one of the growing securities markets in the world, realising a considerably higher return for the funds invested,” Sri Lanka’s monetary authority said in a statement.
“At the same time, the RBI investments in the Sri Lankan government securities market would lead to greater stability in the Sri Lankan government bond market.”

It has been the practice of pegged countries to invest in US and Western European bonds which are liquid and face no exchange restrictions when they are sold.

But of late there has been greater interest in investing in higher yielding debt of other countries which also have tended to have more stable or appreciating exchange rates with improving monetary policy.

Governments of countries that attract foreign reserve assets can enjoy lower cost of capital and can deficit spend-more easily.

But central banks that invest in securities in currencies other than that of the anchor or intervention currency can suffer cross-currency forex losses in times of volatility.

Sri Lanka which is loosely pegged to the US dollar has suffered reserve losses on Euro during the 2009 crisis, and has recently lost money on gold.
The bilateral agreement was signed by Sri Lanka’s Central Bank Governor Ajith Nivard Cabraal and the Governor Reserve Bank of India, Raghuram Rajan.

The deal allows Sri Lanka’s central bank to buy up to 500 million US dollar equivalent Indian rupee securities and vice versa.

The deal was signed after a meeting of a South Asian central bank governors.