* Yield falls due to lower govt borrowing pressure
* Expects 2017 growth between 4.5-5 pct despite sluggish H1 growth
* Central bank buying dollars to prevent appreciation
* Sri Lanka has met all end-June IMF targets (Adds comment, detail)
By Shihar Aneez
COLOMBO, July 12 (Reuters) - Sri Lanka's central bank expects a further fall in T-bill yields due to less pressure from government borrowing and a proposed new auction system, the bank's deputy governor, Nandalal Weerasinghe, said on Wednesday.
The yield on the benchmark 364-day T-bill has dropped 66 basis points since April 21, from a near four-year high of 11.11 percent, despite the central bank raising its key policy rates by 25 basis points in March.
Yields on 182-day and 91-day T-bills have also fallen 53 bps and 13 bps respectively in the same period.
"We expect it will continue because there is no pressure in terms of maturity and also the government has a buffer in terms of external financing," Weerasinghe told Reuters.
The central bank also expected to introduce a new auction system for government securities including competitive and non-competitive bidding and underwriting, which will lower yields, he said.
Sri Lanka's T-bill yields rose continuously as the central bank tightened monetary policy four times from December 2015 to March this year to curb a sharp depreciation in the rupee and stubbornly high credit growth.
Weerasinghe said the central bank had completely stopped defending the currency, unlike in the past. The rupee has fallen about 2.6 percent this year.
He said since February, the bank had only been buying dollars, not selling them at all.
"We don’t see a pressure on the rupee. It is market-driven demand and supply. If we don’t intervene and buy, probably it would have been appreciated. We are buying and preventing certain appreciation."
The central bank's aggressive dollar buying comes after it missed end-December reserve target included in an IMF loan and Weerasinghe said the monetary authority had bought about $700 million up to the end of June.
The bank has set a target of $1.2 billion in direct market purchases of dollars to boost the island nation's reserves this year.
Weerasinghe said authorities had met all end-June IMF targets including fiscal, monetary, reserves, structural reforms, and a new inland revenue bill.
Despite sluggish growth in the first half of this year due to a drought followed by floods, the country could still achieve a growth target of between 4.5 percent to 5 percent this year, he said. (Reporting by Shihar Aneez; Editing by Robert Birsel)