There has been direct state borrowing from banks, especially to fund roads, instead of relying only on Treasury bills, which analysts say may be widening the gap between Treasuries and bank lending rates.
Three month gilt-backed repurchase deals were quoted at 7.
00/7.20 percent levels compared to a 7.42 percent weighted average yield at last week's Treasuries auction.
One year rates were quoted around 7.
40/50 percent against 7.95 percent last week at the auction.
Excess rupee reserves in Sri Lanka's banking system have now climbed to 59 billion rupees.
The Central Bank last stopped giving bills for excess cash parked at its standing facility and unlike in the case of repos, banks now expect to pay withholding tax on window interest.
The actual yield on the standing facility would be less than 6.
00 percent.
"So everyone is now chasing after bills," a dealer said.
At this week's auction Treasuries yield are expected to go down.
It is not yet clear what the implications of the move are, but if banks are discouraged from lending to the Central Bank it will be a monetary loosening, analysts say.
Repo based lending is also risk free.
Sri Lanka's central bank has run out Treasuries to give to banks.
Next week the proceeds of a billion US dollar bond is expected to come to the country further expanding liquidity.