The excess liquidity in the monetary system has significantly decreased by Rs 20.89 billion over the past year, according to data from the Bank of Mauritius (BoM). This reduction in excess liquidity is said to be attributed to various operations, Governor Harvesh Seegolam said.
Since January 2023, the weekly issuance of seven-day bonds has averaged Rs 47.2 billion, while banks have utilised the day-to-day deposit facility with a daily average of Rs 26.6 billion. To address the structural excess liquidity in the banking system, the BoM has introduced longer-term instruments with maturities of up to three years.
However, economist Sameer Sharma argued that despite holding over Rs 140 billion in bonds, the excess liquidity in foreign currency held by banks has also decreased, indicating tight foreign exchange markets. Sharma noted that the Central Bank’s policy has not fully resolved the complexity of the current situation, as inflation expectations still exceed the BoM’s target. He attributed this to the BoM’s lack of credibility due to fiscal dominance.
Sharma explained that although the BoM can influence the secondary bond market and, consequently, the credit market through its key interest rate, short and medium-term bond yields in Mauritius are lower or very close to the 4.5% policy rate. This situation has led banks to invest in longer-term bonds, compressing bond yields downwards. However, it also results in a yield spread increase between US Treasury and local bonds, possibly requiring the BoM to maintain its forex rationing policy for an extended period.
The BoM’s strategy encourages banks to purchase longer-term securities, and with the government issuing more bonds and the BoM holding longer-term instruments, liquidity is absorbed. Nevertheless, Sharma highlighted that the liquidity is not injected into the economy, as banks predominantly invest their funds in bonds, even when interest rates are unattractive.
Effectively, this means that a significant portion of the money supply remains within the bond market and the BoM’s instruments, impacting the central bank’s ability to control inflation and bring it back within its target range.
Source: Defi Media
