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Communications Department 30, Janadhipathi Mawatha, Colombo 01, Sri Lanka. Tel : 2477424, 2477423, 2477311 Fax: 2346257, 2477739 E-mail: [email protected], [email protected] Web: www.cbsl.gov.lk Press Release Issued By Date Economic Research Department 25-11-2008 Central Bank Further Reduces Statutory Reserve Requirement (SRR) The shortage of liquid dollar balances in international financial markets arising from the ongoing global financial crisis and the higher demand for domestic funds have caused a prolonged liquidity shortfall in the domestic financial markets. The Central Bank has closely monitored these market developments and thus taken various measures to address the liquidity constraints, but a deficit continued in the market, thereby disturbing the smooth functioning of the banking system. In order to address these adverse consequences, the Central Bank reduced the SRR on rupee deposit liabilities of commercial banks by 75 basis points to 9.25 per cent on 17 October, 2008. In addition to this, the Central Bank has also been injecting additional liquidity by way of providing reverse repo facilities to commercial banks and primary dealers. Notwithstanding these measures, a deficit in market liquidity still persists and therefore, the Central Bank has now decided to further reduce the SRR applicable to rupee deposit liabilities of commercial banks and thereby to inject further liquidity to the banking system. Accordingly, the Central Bank has decided to reduce the SRR further by 150 basis points to 7.75 per cent from its current rate of 9.25 per cent with effect from the reserve week commencing 28 November 2008. This move is expected to release around Rs. 17 billion to the market, which would help ease the liquidity deficit and upward pressure on market interest rates. Further, this move is expected to reduce the interest rate spread of commercial banks, thus enabling them to lend at lower and more desirable rates as well. It is also expected that by addressing the liquidity shortfall in the market, the cost of funds of the private sector would decrease and that would facilitate the smooth functioning of economic activities. It should also be noted that since inflation is already on a decelerating trend at a faster rate than expected, this measure is not expected to pose any threat to the inflation outlook.