Sri Lanka rupee bonds continued to attract foreign investor interest in early 2025, with overseas investors extending net inflows despite global bond fund outflows, reinforcing confidence in the island nation’s fixed-income market stability.
Sri Lanka rupee bonds attract steady foreign buying despite global outflows
Foreign investors continued to accumulate Sri Lanka rupee bonds in the first week of the new year, extending a sustained run of overseas inflows into domestic government securities. Central Bank data showed that foreign investors purchased approximately three million US dollars’ worth of Sri Lanka government securities in the week ending January 1, lifting total net inflows for 2025 to about 234.4 million US dollars.
The latest weekly inflow marked the thirteenth week of foreign buying within the last eighteen weeks, underlining a notable turnaround in investor sentiment toward Sri Lanka’s risk-free fixed-income assets. As a result, foreign holdings of government securities have climbed to their highest level in nearly 26 months, reflecting renewed confidence following a period of prolonged outflows.
In rupee terms, foreign investors recorded a net purchase of around 938 million rupees during the week, equivalent to roughly 3.07 million US dollars at an exchange rate of 305 rupees per dollar. This inflow came in sharp contrast to broader global trends, where international bond markets experienced renewed pressure.
According to data cited by Reuters, global bond funds posted net outflows of about 1.97 billion US dollars during the same week, marking their first weekly sales since mid-April. Despite this temporary setback, global bond funds have attracted substantial inflows so far in 2025, totaling nearly 891.7 billion US dollars, following strong inflows of approximately 1.05 trillion US dollars recorded in 2024.
Short-term bond funds, in particular, saw notable withdrawals, with net outflows of around 5.23 billion US dollars after a sizable inflow the previous week. Analysts suggest this shift reflects heightened sensitivity to changing interest rate expectations and renewed caution among global investors amid evolving monetary policy signals.
Against this backdrop, Sri Lanka’s ability to attract foreign investment into local currency debt stands out. Cumulative inflows into rupee-denominated government securities have reached approximately 71.5 billion rupees so far in 2025, equivalent to around 234.4 million US dollars. Over the last eighteen weeks, the island nation has recorded net foreign inflows of nearly 34.8 billion rupees, or about 113.7 million US dollars, indicating a sustained recovery in foreign participation.
Market participants attribute the renewed interest in Sri Lanka rupee bonds partly to global investors seeking relative safety following a US Federal Reserve rate cut early last month and growing expectations of further monetary easing. As uncertainty persists in global equity and currency markets, demand for stable yield-bearing instruments has increased, benefiting select emerging and frontier markets with improving macroeconomic fundamentals.
Sri Lanka’s experience, however, has not been without interruptions. The country witnessed a brief outflow of around 10.1 billion rupees, or approximately 32 million US dollars, in the two weeks following former US President Donald Trump’s tariff announcement in early April. The episode contributed to mild pressure on the rupee, which has since weakened slightly, though without triggering significant market disruption.
Analysts note that Sri Lanka’s deflationary policy framework has played a supportive role in restoring investor confidence. Measures aimed at curtailing imports, stabilizing prices, and maintaining tight monetary conditions have helped create an environment conducive to foreign inflows, particularly into government securities perceived as low-risk.
The recent inflows also mark a reversal from 2024, when Sri Lanka recorded foreign outflows totaling approximately 48.2 billion rupees. Notably, nearly two-thirds of that amount, around 78.1 billion rupees, exited government securities during the first nine months of last year, reflecting heightened uncertainty and constrained access to foreign capital at the time.
The shift in trend highlights the gradual normalization of Sri Lanka’s financial markets as macroeconomic stability improves. While risks remain, including external shocks and global monetary policy volatility, the steady foreign demand for Sri Lanka rupee bonds suggests that investors are increasingly willing to re-engage with the country’s local currency debt market.