The Sri Lanka rupee strengthened slightly in early Wednesday trading as broader bond yields remained steady across the market. The modest improvement comes amid ongoing concerns over liquidity management and exchange-rate policy direction.
Sri Lanka rupee shows renewed strength as bonds hold firm in mid-week trading
The Sri Lanka rupee opened at 308.20/40 to the US dollar on Wednesday, marking a marginal appreciation from Tuesday’s level of 308.25/75, according to market dealers. The shift, though small, is notable as the currency has experienced a steep depreciation throughout 2025, even as the country recorded significant current account surpluses. Economists tracking these trends argue that the rupee’s trajectory reflects deeper structural and monetary policy concerns rather than trade imbalances alone.
Despite the encouraging surpluses, the nation’s central bank has faced criticism for its approach to liquidity injections via dollar buy-sell swaps executed over the course of the year. While these operations provided temporary relief to liquidity-tight markets, analysts say the failure to release dollars back to private importers allowed domestic credit to expand unsustainably. As imports rose on the strength of private credit, the rupee came under renewed pressure, offsetting any gains associated with the external account improvements.
Adding to the complexity is the government’s rapidly shrinking budget deficit. Historically, Sri Lanka’s central bank has pointed to fiscal deficits as a primary driver of balance-of-payments instability since as far back as 1952. This narrative emphasized that deficit-financed spending, combined with artificially suppressed interest rates, created fertile ground for inflationary pressures and currency volatility. Yet in 2025, the contraction in the deficit coincided with a currency weakening pattern, challenging long-held assumptions linking fiscal discipline with exchange-rate stability.
Economic researchers observing the situation attribute much of the current pressure to the central bank’s continued dollar purchases and its management of excess liquidity. The reluctance to return dollars to importers, especially during periods of rising private credit, has been a recurring issue under Sri Lanka’s flexible exchange-rate regime. This framework, combined with flexible inflation targeting, has been criticized for granting central banks broad discretion that can occasionally tilt toward an inflationary bias. Some analysts contend that these policies depart from classical economic fundamentals by enabling currency depreciation even when the domestic monetary environment appears stable or deflationary.
Critics argue that discretionary policy becomes particularly destabilizing during economic recoveries, when private credit growth accelerates. Historically, prior to the IMF’s Second Amendment, monetary authorities in many countries—including Sri Lanka—were restricted from allowing discretionary depreciation. Today, however, the central bank retains the authority to influence the currency via buy-sell operations and liquidity adjustments, potentially pushing up prices for essential commodities such as fuel and food if depreciation intensifies. For businesses and households already navigating high costs, even moderate depreciation can strain profitability, disposable income, and overall economic resilience.
Inflation targeting has also raised questions in recent months. The central bank has struggled to consistently meet its 5 percent inflation target, employing largely deflationary measures aside from its dollar-swap operations. Nonetheless, the possibility of further depreciation places upward pressure on tradable commodity prices and may complicate future inflation-management efforts. If energy and food costs rise sharply, companies may face narrowing margins while consumers contend with diminished purchasing power.
In the government securities market, bond yields showed little movement during Wednesday’s session. The actively traded bond maturing on 15 September 2029 was quoted at 9.45/47 percent, reflecting stability amid cautious investor sentiment. The 1 July 2030 maturity remained flat at 9.57/60 percent, while the 15 December 2032 bond edged slightly higher to 10.25/29 percent from 10.22/28 percent previously. Dealers indicated that market activity was moderate as an 86-billion-rupee Treasury bill auction proceeded concurrently.
Meanwhile, telegraphic transfer rates reaffirmed ongoing foreign-exchange dynamics. The US dollar was quoted at 304.5000 for buying and 311.5000 for selling. The British pound traded at 398.8116 buying and 410.1734 selling, while the euro was posted at 350.2443 buying and 361.6075 selling. These rates reflect continuing adjustments influenced by global currency movements and domestic liquidity patterns.
Equity markets offered a bright spot in mid-week activity. The Colombo Stock Exchange saw the All Share Price Index rising 0.23 percent, or 53.16 points, to reach 23,104. The S&P SL20, however, dipped 0.20 percent, or 12.78 points, settling at 6,389. Market analysts said investors were absorbing mixed global cues while awaiting clearer signals on local interest-rate policy, fiscal reforms, and monetary strategy.
As the week progresses, traders and policymakers alike will continue monitoring the Sri Lanka rupee closely for indications of whether Wednesday’s modest strengthening represents a temporary fluctuation or the beginning of a more durable correction. With liquidity management, dollar flows, and policy credibility all influencing the exchange-rate outlook, the currency’s path remains firmly tied to broader economic decision-making.