Sri Lanka rupee strengthens marginally in Friday trading as the currency recovered slightly in the spot market, while government bond yields edged higher, reflecting cautious sentiment across foreign exchange, debt, and equity markets.
Sri Lanka rupee strengthens amid mixed forex sentiment and firmer bond yields
Sri Lanka’s currency posted a modest gain on Friday, with the rupee firming slightly against the US dollar in spot market trading, even as government bond yields moved higher and broader financial markets reflected mixed investor sentiment.
Currency dealers said the rupee was quoted at 309.30/50 to the US dollar on Friday, improving from 309.40/55 recorded in the previous session. The marginal strengthening followed a week of gradual depreciation, during which the currency had come under pressure amid ongoing liquidity dynamics and selective foreign exchange interventions.
Despite the modest recovery, the rupee remains weaker compared with its position a week earlier, when it closed at 309.05/15. Market participants noted that short-term movements continue to be influenced by central bank activity, importer demand, and liquidity conditions rather than a decisive shift in underlying fundamentals.
Over a longer horizon, the rupee has experienced notable depreciation. Since December 2024, the currency has fallen from around 292 to the US dollar, even as Sri Lanka recorded record current account surpluses and narrowing fiscal deficits. Analysts attribute this divergence to monetary and exchange rate policy actions, particularly the central bank’s selective denial of convertibility to private importers following dollar purchases that injected additional liquidity into the financial system.
When the central bank accumulates foreign reserves by buying dollars, it creates new domestic currency unless that liquidity is fully absorbed. Dealers note that if importers are unable to access foreign exchange freely, the resulting liquidity can circulate within the system and later return to the foreign exchange market, exerting renewed pressure on the rupee. This dynamic has been cited as a key factor behind the currency’s depreciation trend despite improving external balances.
While the foreign exchange market showed tentative stability on Friday, the government securities market reflected a slightly firmer yield environment. Bond yields edged up across several maturities, suggesting cautious positioning by investors amid expectations around interest rates and liquidity management.
A government bond maturing on December 15, 2028 was quoted at yields of 9.07 to 9.12 percent. The bond maturing on September 15, 2029 was quoted at 9.47 to 9.52 percent, rising from 9.40 to 9.50 percent in the previous session. Longer-dated securities also reflected higher yields, with the bond maturing on December 15, 2032 quoted at 10.30 to 10.35 percent, and the June 15, 2035 maturity trading at yields of 10.65 to 10.70 percent.
Traders said the upward movement in yields was modest but reflected ongoing reassessment of rate expectations, particularly in light of liquidity conditions and potential policy signals. Investors continue to balance expectations of economic recovery against concerns over excess liquidity and its impact on inflation and exchange rate stability.
In the retail foreign exchange market, telegraphic transfer rates published by commercial banks showed the US dollar buying rate at 305.8500 rupees and the selling rate at 312.8500 rupees. The British pound was quoted at 408.2874 buying and 419.6492 selling, while the euro stood at 356.3547 buying and 367.7179 selling. These rates reflected continued volatility in global currency markets alongside domestic factors.
Equity markets, meanwhile, recorded gains, offering a more positive signal for investor sentiment. On the Colombo Stock Exchange, benchmark indices trended higher during the session. The All Share Price Index rose by 0.43 percent, gaining 96.82 points to close at 22,195. The more liquid S&P SL20 Index advanced by 0.15 percent, adding 9.10 points to finish at 6,075.
Market participants said the uptick in equities suggested selective buying interest, particularly in blue-chip counters, even as investors remained cautious amid mixed signals from currency and bond markets. The divergence between equity gains and firmer bond yields highlighted the complexity of current market conditions, with different asset classes responding to distinct drivers.
Analysts noted that while Sri Lanka rupee strengthens marginally in day-to-day trading, sustained stability will depend on consistent monetary discipline and clearer exchange rate policy signals. Liquidity management, access to foreign exchange for importers, and alignment between fiscal and monetary policy will remain critical in shaping currency and bond market outcomes.
As markets head into the coming week, investors are expected to closely monitor central bank operations, liquidity trends, and movements in government securities for cues on the near-term direction of the rupee and interest rates. For now, the modest currency gain and firmer yields point to a market still searching for equilibrium amid competing pressures.