The Central Bank of Sri Lanka (CBSL) and the Reserve Bank of India (RBI), on Thursday, signed an agreement, enabling the RBI to access the Sri Lankan government securities market, up to a maximum value of $500 million.
The CBSL, in turn, will be able to further diversify its reserves management activities into Indian rupee denominated assets, a press release from the Central Bank here said.
The agreement was signed between RBI Governor Raghuram Rajan and Central Bank of Sri Lanka Governor Ajith Nivard Cabraal on the sidelines of the SAARCFINANCE Governors’ Symposium here, a day ahead of Central Bank Economists’ meeting on the theme ‘Reaping mutual benefits through intra-regional investments of reserves’. Dr. Rajan, who later spoke on capital regulation at the Central Bank, made a case for measured regulation in emerging markets. Drawing attention to the challenge of economies getting the right amount of regulation, he asked if emerging markets and industrial markets had the same concerns.
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Regulations needed to show that they were on the job post financial crisis, he said, adding that the tendency to over-regulate constrained the banks in times of trouble.
On debt markets, Dr. Rajan said short-term debt markets tend to attract a type of investor, who wants to be relatively well protected, who does not want spend a lot of time to understand the country or stay for a long term. “In the July episode, we saw a lot of capital flight. Last year our markets were at the shorter end of the spectrum.”
“We have to work on building liquidity while protecting the markets from risks. So what we have done is nudged bond investors into longer term securities… overtime we will also expand the room for those (short term) investors to come in,” he said.The idea, he said, was to go more liberal rather than away from it [liberalisation].
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