Sri Lanka rupee opened slightly weaker against the US dollar on Tuesday as bond yields on shorter maturities edged up, reflecting cautious market sentiment amid recent currency depreciation and evolving liquidity conditions in the domestic financial system.
Sri Lanka rupee opens softer while short-term bond yields edge higher
The Sri Lanka rupee traded marginally weaker in early market activity on Tuesday, extending a depreciation trend observed in recent weeks, while government bond yields on shorter tenors showed a modest uptick. Market participants said currency movements remained closely linked to liquidity conditions and central bank operations in the foreign exchange market.
In the spot market, the Sri Lanka rupee was quoted at 309.60/85 to the US dollar, compared with 309.50/65 at the close of the previous trading session, according to dealers. Although the movement was limited, it underscored persistent pressure on the local currency following a notable weakening trend since late last year.
The rupee has depreciated significantly from around 292 to the dollar in December 2024, despite Sri Lanka recording record current account surpluses and a narrowing budget deficit. Analysts said this divergence has raised concerns among market observers, particularly as traditional macroeconomic indicators would typically support currency stability.
Market participants attributed part of the recent depreciation to central bank actions in the foreign exchange market. Dealers said the monetary authority had selectively denied convertibility to certain private importers after purchasing dollars from the market, a process that also injected liquidity into the banking system. This combination, analysts noted, may have contributed to excess rupee liquidity and weakened the currency despite strong external balances.
Bond markets reflected a cautious stance, with yields on shorter-dated government securities edging higher. A Treasury bond maturing on October 15, 2028 was quoted at yields of 9.15 to 9.20 percent. Meanwhile, a bond maturing on December 15, 2029 was quoted at 9.60 to 9.68 percent, slightly higher than the previous range of 9.55 to 9.62 percent.
Longer-dated securities showed relatively stable yields, indicating that investor expectations for medium- to long-term inflation and interest rates remain anchored. A bond maturing on March 15, 2031 was quoted at 9.90 to 10.00 percent, while a December 15, 2032 maturity was quoted at 10.30 to 10.40 percent. The bond maturing on November 1, 2033 was quoted flat at 10.40 to 10.50 percent, suggesting limited selling pressure at the longer end of the yield curve.
An auction of 150 billion rupees worth of Treasury bills was ongoing during the session, with investors closely watching demand levels and yield outcomes for signals on near-term interest rate expectations. Analysts said the auction results could provide further insight into liquidity conditions and the direction of short-term rates.
In the foreign exchange retail market, telegraphic transfer rates reflected the softer tone of the rupee. The US dollar was quoted at 306.00 rupees for buying and 313.00 rupees for selling. The British pound was quoted at 411.63 buying and 422.99 selling, while the euro traded at 358.22 buying and 369.58 selling. Currency dealers said demand for dollars remained moderate, with corporate requirements largely balanced by exporter inflows.
Despite the currency weakness and firmer bond yields, equities showed a modest positive trend. The Colombo Stock Exchange opened higher, with the All Share Price Index gaining 0.06 percent, or 0.17 points, to reach 21,936. The more liquid S&P SL20 index rose 0.13 percent, adding 8.03 points to trade at 6,022.
Market analysts said the divergence between equity performance and currency movements highlights differing investor expectations across asset classes. While equity investors appear cautiously optimistic about corporate earnings and economic stability, currency and fixed-income markets remain sensitive to liquidity management and policy signals.
Looking ahead, analysts expect the Sri Lanka rupee to remain under close watch as authorities balance reserve accumulation, market liquidity, and exchange rate flexibility. Sustained stability, they said, may depend on clearer policy communication and a consistent approach to convertibility, particularly as external sector performance continues to show strength.
Bond yields, meanwhile, are likely to remain range-bound unless liquidity conditions tighten further or inflation expectations shift materially. With Treasury bill auctions and central bank operations shaping short-term dynamics, market participants said near-term movements would continue to reflect policy-driven factors rather than underlying macro fundamentals alone.