Intra Day Liquidity Facility. Does it have an impact on Monetary Policy?
Assistant Governor of the Central Bank of Sri Lanka, LK
Dr. D S Wijesinghe is an Assistant Governor of the Central Bank of Sri Lanka. He received his B.A. (Hons.) Degree in Economics from the University of Colombo and M.A. and Ph.D. Degrees in Economics from the University of Warwick, UK. His research interests are mainly in the fields of Exchange Rate Policy, Monetary Policy and Macroeconomic Modelling.
The Central Bank provides an intra day liquidity facility (ILF) free of charge to commercial banks and primary dealers to ensure smooth operations of the RTGS system. This paper examines whether the availability of ILF would have an impact on the conduct of monetary policy. It points out that, even before the introduction of the RTGS, intra day liquidity through the Central Bank was available in the form of an implicit intra day overdraft facility and hence, ILF would not have enhanced the liquidity available in the financial system. The paper observes no evidence in the settlement accounts of commercial banks and primary dealers at the Central Bank that the availability of ILF has enabled them to finance a higher volume of transactions. ILF is provided under stringent conditions with heavy penalties for defaults which ensures that the facility is not converted into an overnight credit. Accordingly, the release of funds under the ILF is unlikely to create an adverse impact on the conduct of monetary policy as funds flow back to the Central Bank on the same business day. (JEL E52 E58)