Sri Lanka rupee weaker trading conditions persisted at the start of the week as the local currency edged down against the US dollar, while government bond yields remained broadly steady and equity indices extended modest gains on the Colombo Stock Exchange.
Sri Lanka rupee weaker amid steady bond yields and firm equities
Sri Lanka rupee weaker sentiment continued in Monday’s spot market, with the currency quoted at 309.00/25 against the US dollar, marginally softer compared with 309.05/15 recorded at the previous close, according to market participants. Dealers noted limited volatility in foreign exchange trading, with movements reflecting cautious positioning rather than aggressive shifts in demand or supply.
While the currency softened slightly, activity in the government securities market pointed to stability, as bond yields across most maturities held within narrow ranges. Short- to medium-term securities saw marginal adjustments, reflecting balanced market expectations on interest rates and liquidity conditions.
A government bond maturing on February 15, 2028, was quoted at 8.95/9.00 percent, slightly higher than the previous 8.93/98 percent range. Another bond due on May 1, 2028, was quoted at 9.00/05 percent, edging up from 8.97/9.02 percent, while the October 15, 2028 maturity traded around 9.05/15 percent.
Further along the curve, yields showed limited movement. The June 15, 2029 bond was quoted at 9.35/40 percent, and the December 15, 2029 maturity traded at 9.40/50 percent, marginally lower on the bid side compared with the prior session. Longer-dated securities also remained stable, with the July 1, 2030 bond quoted at 9.57/63 percent and the March 15, 2031 maturity at 9.85/95 percent.
At the long end of the yield curve, the October 1, 2032 bond was quoted at 10.25/35 percent, while the November 1, 2033 bond eased slightly to 10.30/45 percent from 10.35/40 percent previously. The June 15, 2035 maturity was quoted at 10.65/68 percent, indicating that investor appetite for longer tenors remained intact despite broader macroeconomic uncertainties.
In the foreign exchange market, telegraphic transfer rates reflected the softer tone of the local currency. The US dollar was quoted at 305.50 for buying and 312.50 for selling. The British pound traded at 407.45 buying and 418.81 selling, while the euro was quoted at 356.45 buying and 367.82 selling, according to banking sources.
Despite currency weakness, equity market sentiment remained positive. On the Colombo Stock Exchange, benchmark indices extended gains, with the All Share Price Index rising 0.18 percent, or 41.42 points, to close at 22,549. The S&P SL20 index advanced 0.52 percent, gaining 31.69 points to end at 6,129, supported by selective buying in large-cap stocks.
Market observers noted that the Sri Lanka rupee weaker trend has been evident throughout 2025, with the currency depreciating from around 293.10/30 earlier in the year to approximately 308.15/40 more recently. This decline has occurred amid a complex macroeconomic backdrop that includes record current account deficits alongside sharply reduced budget deficits, as higher tax collections strengthened fiscal performance.
Traditionally, currency depreciation in Sri Lanka has often been attributed to current account and trade deficits, fiscal imbalances, or external shocks. However, analysts have increasingly questioned these explanations, pointing instead to structural issues within the central bank’s operating framework.
Some economists argue that in 2025, currency depreciation was driven in part by central bank actions, including the purchase of foreign exchange that effectively monetised balance of payments surpluses, even as monetary policy remained intermittently deflationary. According to this view, such actions placed downward pressure on the currency despite improvements in fiscal discipline.
Concerns have also been raised about the challenges of maintaining monetary stability under a flexible inflation targeting framework. Analysts warn that without consistent reserve accumulation and a clear monetary anchor, the central bank may struggle to stabilise both the currency and interest rates. Rate cuts implemented on the basis of historically low inflation, while overlooking reserve collection requirements, have been cited as contributing factors.
Against this backdrop, the combination of a weaker currency, steady bond yields, and rising equity indices underscores the mixed signals currently emerging from Sri Lanka’s financial markets. While fiscal consolidation and equity market resilience offer some reassurance, currency pressures and structural monetary concerns continue to shape investor sentiment.
As markets move into the latter part of the year, participants are expected to closely monitor central bank policy decisions, external sector trends, and liquidity conditions for clearer direction on the outlook for the rupee, interest rates, and broader financial stability.