The Sri Lanka rupee weakened slightly against the US dollar on Tuesday as domestic currency pressures persisted, while government bond yields remained broadly stable, reflecting cautious market sentiment amid fiscal adjustments and external imbalances.
Sri Lanka rupee outlook steadies despite muted bond market movement
The Sri Lanka rupee edged lower in spot trading on Tuesday, underscoring continued pressure on the local currency even as government securities markets showed signs of stability. Currency dealers quoted the rupee at 309.45/50 to the US dollar, marginally weaker than Monday’s closing levels of 309.25/35, highlighting ongoing demand for foreign exchange amid structural economic challenges.
Despite the softer currency, bond yields across key maturities were largely unchanged, suggesting that investor confidence in sovereign debt remains intact for now. Market participants attributed this stability to expectations of disciplined fiscal management and steady monetary policy signals, even as the economy grapples with persistent current account deficits.
Among actively traded instruments, the Treasury bond maturing on February 15, 2028 was quoted at 8.95/9.00 percent, slightly easing from the previous day’s 8.97/9.00 percent. Another bond with a May 1, 2028 maturity was quoted at 9.00/05 percent, indicating limited yield movement. Longer-dated securities showed similar steadiness, with the September 15, 2029 bond quoted at 9.49/50 percent and the March 15, 2031 maturity at 9.85/95 percent.
Yields on the October 1, 2032 bond edged marginally higher to 10.23/28 percent from 10.22/26 percent, while the November 1, 2033 bond was quoted at 10.40/45 percent. Dealers noted that these minor fluctuations reflected routine portfolio adjustments rather than any fundamental shift in investor outlook.
Foreign exchange markets, meanwhile, continued to reflect the underlying pressures facing the Sri Lankan economy. Telegraphic transfer rates for the US dollar were quoted at 305.7500 for buying and 312.7500 for selling. The British pound was quoted at 407.5969 buying and 418.9587 selling, while the euro traded at 356.9951 buying and 368.3583 selling. These levels indicate sustained demand for hard currencies, particularly from importers and businesses servicing external obligations.
The recent weakness of the Sri Lanka rupee forms part of a broader trend observed throughout 2025. The currency has depreciated from levels around 293.10/30 earlier in the year to above 308 against the dollar, driven largely by record current account deficits. Analysts point out that while fiscal consolidation has reduced the budget deficit, higher taxes and subdued domestic consumption have constrained economic activity, limiting foreign exchange inflows.
At the same time, Sri Lanka’s efforts to restore macroeconomic stability appear to be supporting local financial markets. On the Colombo Stock Exchange, equity indices continued their upward trajectory. The All Share Price Index rose by 0.15 percent, or 33.93 points, to close at 22,328, while the more liquid S&P SL20 gained 0.44 percent, adding 26.49 points to finish at 6,078. Market participants attributed the gains to selective buying in banking and export-oriented stocks, which tend to benefit from a weaker domestic currency.
Investors are also closely watching developments in the government securities market, where an auction of 48 billion rupees in Treasury bills is scheduled for December 17. The outcome of this auction is expected to provide further insight into liquidity conditions and investor appetite for short-term government paper. Stable demand could help anchor yields and provide some support to overall market confidence.
Economists caution, however, that currency pressures are unlikely to ease significantly in the near term without a sustained improvement in external balances. Export growth, tourism earnings, and remittance inflows will be critical in determining the direction of the rupee in the coming months. Any volatility in global financial markets or shifts in US monetary policy could also influence capital flows and exchange rate dynamics.
In the interim, the combination of a slightly weaker currency, steady bond yields, and rising equity indices presents a mixed but cautiously optimistic picture. While challenges remain, particularly on the external front, the relative calm in the bond market suggests that investors are, for now, willing to look past short-term currency movements and focus on longer-term reform prospects.