Why CB hikes T bill rates while cutting its policy rates? Who is responsible for the loss to public funds?

At the first auction held on 12 July after the second policy rate cut of 2% on 5 July, the CB raised T bill yield rates by about 1%. This is a contradiction to the monetary policy easing cycle that commenced on 31 May. However, only Rs. 99.7 bn out of Rs. 160 bn sought was raised from the auction.

This article shows how T bill rates increase continued on the next auction too, raising public concerns over the CB's present interest rates policy and resulting cost to public funds that suffer bankruptcy due to the CB mismanagement of national debt stock.

19 July T bill auction

  • The CB at the auction held on 19 July also raised T bill rates by 0.31%-0.91%. At such higher rates, Rs. 75.5 bn against the funding requirement of Rs. 160 bn was raised (see CB's press releases below).


  • As a result, the cumulative increase in T bill rates at the last two auctions is about 1.5%. This an undisputed loss to public funds as against significant monetary easing cycle on the table with the advice of the IMF and unexpectedly speedier disinflation path towards the monetary policy target of 4%-6%.
CB's questionable interest rates policy
  • CB's general practice has been to use T bill rates to drive its interest rates policy while  retraining the use of policy interest rates (overnight standing deposit facility rate - SDFR - and standing lending facility rate - SLFR, known as policy rates corridor). This is especially evident from April 2022 as T bill rates were heavily used to convey the monetary policy path.

  • For this purpose, T bill rates are manipulated through several devices such as EPF funds, post-auction private placements and CB's post-auction direct purchases of T bills.

  • As a result, T bill rates show a diverse behaviour against policy rates (see the Chart below) that questions the monetary policy rationale.

  • Further, this can help manipulation of the auctions for the benefits of certain dealers. For example, auctions held on 31 May, 5 July, 12 July and 19 July are cited.

  • Accordingly, hiking T bill rates at the last two auctions in contrast to the CB's policy interest rates could be a hidden monetary policy attempt to facilitate certain dealers and investors, especially, foreign investors to encourage hot-capital inflow to boost the CB's foreign reserve and country's BOP in order to mislead the public that the economy is being stabilized back. This is nothing but the old monetary policy game that the CB played on foreign debt that caused the country's bankruptcy at present. The present CB Governor as the then Senior Deputy Governor is quite familiar with this flawed model.

  • Therefore, it is advisable that the public stays alerted on possible policy abuses and resulting losses to public funds.

(This article is released in the interest of participating in the professional dialogue to find out solutions to present economic crisis confronted by the general public consequent to the global Corona pandemic, subsequent economic disruptions and shocks both local and global and policy failures.)

P Samarasiri

Former Deputy Governor, Central Bank of Sri Lanka

(Former Director of Bank Supervision, Assistant Governor, Secretary to the Monetary Board and Compliance Officer of the Central Bank, Former Chairman of the Sri Lanka Accounting and Auditing Standards Board and Credit Information Bureau, Former Chairman and Vice Chairman of the Institute of Bankers of Sri Lanka, Former Member of the Securities and Exchange Commission and Insurance Regulatory Commission and the Author of 10 Economics and Banking Books and a large number of articles published. 

The author holds BA Hons in Economics from University of Colombo, MA in Economics from University of Kansas, USA, and international training exposures in economic management and financial system regulation)

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