Sri Lanka rupee opened stronger against the US dollar on Friday as government bond yields edged lower across the mid- to long-term maturities. Market participants attributed the moves to steady foreign exchange flows and ongoing liquidity and debt management dynamics.
Sri Lanka rupee firms while mid- to long-term bond yields edge lower
The Sri Lanka rupee strengthened modestly in early trade on Friday, while government bond yields continued to soften along the mid- to long-end of the yield curve, according to market dealers. The currency was quoted at 309.30/40 to the US dollar in the spot market, improving from 309.45/50 recorded in the previous session.
The firmer opening reflected cautious optimism in the foreign exchange market amid stable inflows and expectations of contained liquidity pressures. Dealers noted that although the movement was marginal, it extended a recent pattern of relative stability in the rupee following weeks of heightened volatility driven by monetary operations and debt-related foreign exchange transactions.
In the government securities market, yields edged lower on several maturities, indicating sustained demand for longer-dated paper. A Treasury bond maturing on 15 June 2029 was quoted at 9.45/50 percent, while the 15 September 2029 maturity stood at 9.50/55 percent. The bond maturing on 15 December 2029 eased to 9.52/58 percent, compared with 9.55/60 percent previously.
Further along the curve, the bond maturing on 1 July 2030 was quoted at 9.68/71 percent. Yields on longer tenors also showed slight declines, with the 1 October 2032 bond quoted at 10.21/24 percent, down from 10.23/25 percent. The 1 June 2033 maturity was seen at 10.55/60 percent, marginally lower than the previous day’s 10.57/60 percent.
At the far end of the curve, bonds maturing on 15 June 2034 were quoted at 10.77/80 percent, while the 15 June 2035 maturity eased to 10.80/86 percent from 10.82/87 percent. Dealers said the gradual easing in yields suggested continued investor confidence in longer-term instruments, despite lingering concerns over fiscal consolidation and monetary policy execution.
In the retail foreign exchange market, telegraphic transfer rates reflected similar stability. The US dollar was quoted at 305.9500 rupees buying and 312.9500 rupees selling. The British pound was quoted at 413.0902 buying and 424.5818 selling, while the euro traded at 358.2036 buying and 369.7516 selling.
Underlying market sentiment continues to be shaped by the central bank’s foreign exchange operations during 2025. Official data show that the monetary authority sold 356.1 billion rupees worth of foreign exchange—equivalent to about 1.1 billion US dollars—to the government to facilitate debt repayment. These sales were carried out as unsterilized reserve transactions, directly affecting domestic liquidity.
At the same time, the central bank created 530.3 billion rupees in new money through net purchases of foreign exchange, amounting to around 1.7 billion US dollars at an average exchange rate of 301 rupees. This effectively monetized a balance of payments surplus, expanding liquidity and exerting downward pressure on short-term interest rates earlier in the year.
Market analysts note that the interaction between unsterilized dollar sales and purchases has had mixed effects on liquidity conditions. While reserve sales to repay debt tend to absorb rupee liquidity and support the currency, net dollar purchases inject liquidity that can eventually translate into higher imports and investment demand. The balance between these forces has been a key determinant of recent movements in the rupee and the yield curve.
Despite these complex dynamics, Friday’s market action suggested a degree of short-term equilibrium. Dealers said the firmer currency and softer bond yields pointed to improved confidence, at least at the margin, as investors assess the sustainability of recent policy measures and external flows.
Equity markets also recorded modest gains. On the Colombo Stock Exchange, the All Share Price Index rose 0.09 percent, or 21.12 points, to close at 23,790. The more liquid S&P SL20 index gained 0.33 percent, rising by 21.77 points to 6,624. Market participants said the positive close reflected selective buying interest amid expectations of stable macroeconomic conditions.
Overall, the combination of a stronger Sri Lanka rupee, easing bond yields, and higher equity indices underscored a cautiously constructive tone across financial markets. While challenges related to debt management, inflation expectations, and monetary policy implementation remain, the day’s movements suggested that investors are, for now, taking comfort from relative stability in currency and interest rate indicators.