First Capital Research believes that there is a possibility for a rate cut considering the need to address the sluggishness in economic activity despite the 50 bps rate cuts each in May and August.

CBSL, maintained its policy rates at current levels as they believed that private sector credit may pick gradually and also there is ample space for market lending rates to adjust downwards in response to the policy measures taken to address the subpar economic growth which was affected by Easter Sunday attacks.

The external outlook favoring Sri Lanka, easing political uncertainty and positive macro environment provides opportunity for monetary easing despite the risk in lower liquidity position.

"Accordingly, we do not rule out a possibility of a rate cut though at a lower probability of 40%. We are more biased towards a rate cut in Dec 2019 considering the risk in lower liquidity position,” the pre-policy analysis said in a statement.

The Federal Reserve,in late Oct 2019 cut benchmark overnight lending rate a quarter-point, the 3rd such move in 2019 while most of the committee members saw the moves as enough to support the outlook of moderate growth.

Following the US’s Fed move, China, Thailand and Gulf countries also joined a round of monetary easing.

Strengthening macroeconomic indicators and the current high yields has been slowly attracting foreign inflows which is likely to further accelerate post Presidential Election amidst easing political uncertainty to a certain extent. With the support of foreign inflows, currency has been strengthening over the past couple of weeks.

"We believe, a significantly undervalued rupee (as indicated by the REER) and lower credit growth, provides room for CBSL to buy dollars, strengthening the reserves and increasing liquidity in the system,"First Capital Research said.

Sri Lanka’s external position looks comfortable near-term, with foreign reserves at USD 7.8Bn as at Oct 2019 and the improved current account position. CBSL plans to raise a Samurai bond of USD 500.0Mn in Dec 2019, further adding cushion to the foreign reserves.

"We expect reserves to hover comfortably around USD 8.0Bn mark with sufficient foreign repayment cover during the rest of 2019. Accordingly, we expect the comfortable position in the external sector to exert lower pressure on reserves," FC said.

Post Easter Sunday attacks, SL’s GDP growth for 2Q2019 slowed down to 1.6%.First Capital Research expects GDP growth to gradually improve with lower interest rates and the election season.

Private sector credit growth continues to remains negligible with Jan-Sep 2019 growth at 2.13%.

Despite CBSL cutting rates in Aug 2019 for the 2nd time, the decline in interest rates has been slow amidst the high level of NPLs in the system forcing CBSL to introduce lending caps to banks.

Post completion of the Presidential Election business activity and credit growth has shown slow progress but continues to remain below expectations calling for further monetary easing.