The Sri Lanka rupee edged weaker against the US dollar as midweek trading reflected cautious market sentiment and stable bond yields. Analysts continued to warn that central bank dollar purchases could distort currency signals and reignite inflationary pressures.
Sri Lanka rupee trades softer while bond yields remain broadly steady
The Sri Lanka rupee traded marginally weaker in the domestic spot market on Wednesday, highlighting ongoing concerns about currency management and monetary discipline. Market participants quoted the local currency at 310.10/20 to the US dollar, compared with 310.00/10 in the previous session, while government bond yields opened broadly unchanged, indicating relative stability in the debt market despite forex pressures.
Currency analysts cautioned that persistent intervention by the central bank through dollar purchases could undermine the rupee’s natural market equilibrium. When the monetary authority buys dollars at elevated levels, particularly around the 310 mark, it sends a strong signal that encourages further depreciation. Such intervention, they argue, risks pushing the exchange rate lower than warranted by underlying economic fundamentals.
Unlike foreign exchange demand from importers or the Treasury, central bank dollar purchases inject new liquidity into the financial system. This process effectively creates additional rupees, which then circulate through the economy and exert downward pressure on the currency. Analysts note that when these purchases are one-sided and sustained, the rupee struggles to recover, even if external conditions such as US monetary policy remain relatively supportive.
Economists have warned that unless excess rupee liquidity is actively neutralized, or sterilized, through deflationary policy measures, the newly created money tends to “boomerang” back into the foreign exchange market. This dynamic can intensify depreciation pressures and complicate broader macroeconomic management. Over time, a weaker currency feeds directly into higher import costs, particularly for essential commodities such as energy and food, increasing the cost of living for households.
Sri Lanka’s currency trajectory over the long term has been shaped by structural policy decisions and shifts in monetary governance. Analysts point out that the rupee has depreciated dramatically from historical levels, moving from around 4.77 to the US dollar several decades ago to current levels above 310. They argue that insufficient accountability mechanisms and prolonged reliance on monetary expansion have contributed to this outcome, especially in the post-1980 period.
Meanwhile, foreign exchange dealer quotes reflected a mixed performance among major currencies. Telegraphic transfer rates showed the US dollar buying at 306.5000 and selling at 313.5000. The British pound was quoted at 413.1563 on the buying side and 424.5181 on the selling side, while the euro traded at 356.3883 buying and 367.7515 selling. These rates underscored ongoing volatility in global currency markets, which continues to influence local trading sentiment.
In the government securities market, bond yields remained broadly steady, suggesting that investor expectations around interest rates and inflation have not shifted significantly in the short term. A bond maturing on December 15, 2028, was quoted at 9.25/30 percent, slightly higher than the previous day’s levels. The December 15, 2029 maturity traded at 9.70/72 percent, marginally lower, while the July 1, 2030 bond eased to 9.75/78 percent.
Longer-dated securities showed modest movements as well. The October 1, 2032 bond edged higher to 10.32/40 percent, while the November 1, 2033 maturity was quoted at 10.52/60 percent. These yield movements indicated a market that remains cautious but not alarmed, balancing currency risks against expectations of stable monetary conditions.
An ongoing Treasury bill auction, offering 100 billion rupees, added another layer of interest for investors tracking liquidity conditions. Demand at the auction will be closely watched as an indicator of market confidence and the effectiveness of the government’s short-term borrowing strategy.
Overall, the softer performance of the Sri Lanka rupee reflects a delicate balance between policy intervention and market forces. While bond markets suggest near-term stability, analysts continue to stress that sustained currency strength will depend on disciplined monetary policy, transparent intervention strategies, and credible efforts to contain excess liquidity. Without these measures, even modest depreciation risks could translate into broader economic pressures over time.