Foreigners sell Sri Lanka rupee bonds for the second consecutive week, reflecting renewed pressure on the currency and cautious investor sentiment. Central Bank data suggests this trend is linked to shifting market conditions and currency volatility.
Fresh pressures emerge as foreigners sell Sri Lanka rupee bonds for a second straight week
Foreign investors reduced their exposure to Sri Lankan rupee-denominated government securities for the second week in a row, signalling a notable shift in sentiment as the currency continues to face depreciation pressures. Central Bank data for the week ending November 20 confirmed that foreign holders sold approximately 6.2 million US dollars worth of government securities, deepening a pattern that has emerged intermittently over the past three months. This latest withdrawal follows a sell-off of 920 million rupees the previous week, reflecting a cautious approach among investors amid changing macroeconomic factors.
The move marks the third time in twelve weeks that foreign investors have reduced positions in rupee bonds, even though holdings had recently climbed to a two-year high. Earlier in November, foreign participation surpassed 141 billion rupees, a level not seen in nearly twenty-four months. Despite the recent selling, the broader trend since late last year has been one of inflow recovery, following a prolonged period of financial strain and limited foreign appetite for domestic debt.
According to market analysts, the renewed selling is closely tied to the rupee’s gradual decline in recent weeks. A combination of rising import demand, stronger private sector credit growth, and steady Central Bank dollar purchases aimed at rebuilding foreign reserves has contributed to mild currency weakness. These developments have, in turn, encouraged some foreign bondholders to trim positions to mitigate currency risk.
Even with the recent outflows, Sri Lanka still recorded a net inflow of 31.95 billion rupees, equivalent to about 106.5 million US dollars, over the past thirteen weeks. The steady improvement reflects the impact of ongoing deflationary-oriented macroeconomic policies, which have helped moderate domestic demand and curb import volumes. These measures have been essential in restoring balance to foreign exchange markets, though they have also slowed broader economic expansion.
Historically, global developments have also played a role in influencing foreign investor activity in Sri Lanka’s bond market. Notably, the country experienced a significant outflow of 10.1 billion rupees immediately following the tariff announcement made by former US President Donald Trump in April. That episode triggered short-term volatility, causing the rupee to slip slightly and prompting foreign investors to reassess emerging market exposure. While such external shocks continue to shape sentiment, domestic fundamentals remain a key driver in current investment decisions.
Long-term data shows that since December 26 of last year, Sri Lanka has attracted approximately 69.3 billion rupees—around 231 million US dollars—in foreign investment into rupee-denominated bonds. This trend highlights a renewed willingness among external investors to re-engage with Sri Lankan assets following the island’s economic stabilization efforts. Lower inflation, fiscal restructuring momentum, and reserve-building initiatives have supported this recovery and helped anchor investor confidence.
However, risks remain. In 2024, Sri Lanka experienced foreign outflows totalling 48.2 billion rupees, a significant portion of which came from government securities. During the first nine months of last year, outflows reached 78.1 billion rupees, equivalent to 66 percent of total foreign exits. These figures underscore the volatility that continues to characterize foreign participation in the country’s debt market, especially during periods of global uncertainty or domestic imbalances.
The recent two-week sell-off does not yet signal a major structural reversal, but it highlights the delicate balance facing policymakers. With the currency under renewed strain, the Central Bank may continue to intervene strategically to manage liquidity and maintain stability. Meanwhile, foreign investors are likely to continue monitoring key indicators such as inflation trends, reserve growth, external financing flows, and the pace of economic recovery.
While rupee bond inflows have supported Sri Lanka’s financial position in recent months, consistent currency pressure could limit investor appetite in the medium term. For now, the overall inflow trajectory remains positive, but sustaining it will require maintaining macroeconomic discipline, strengthening fiscal reforms, and ensuring transparent communication to the global investor community. Whether the recent selling becomes a broader trend will depend on how effectively authorities manage these competing pressures in the months ahead.