Sri Lankan, Indian central banks agree scope for government debt buys

COLOMBO (Reuters) - The central banks of India and Sri Lanka have agreed they can buy up to the equivalent of $500 million in each other's government debt to diversify their currency reserves, the Sri Lankan bank said on Thursday.

"The central bank of Sri Lanka could now access one of the growing securities markets in the world, realising a considerably higher return for the funds invested," it said in a statement.

"At the same time, the RBI investments in the Sri Lankan government securities market would lead to greater stability in the Sri Lankan government bond market."

Foreign investors can only hold up to 12.5 percent of total government securities. They have already bought up to 12 percent or 469.5 billion Sri Lanka rupees ($3.6 billion) worth government securities as of July 16, latest data showed.

Ajith Nivard Cabraal, Sri Lanka's central bank governor, said it can accommodate the RBI's investments.

"We will find a way. I do not see any problem. Sometimes, we may retire an equal amount and accommodate it. It is a landmark agreement," Cabraal told Reuters.

($1 = 130.2000 Sri Lankan Rupees)

(Reporting by Shihar Aneez and Ranga Sirilal; Editing by Rafael Nam/Ruth Pitchford)