The Sri Lanka rupee traded steady at 304.45/55 against the US dollar on Thursday, maintaining stability after recent volatility. Market confidence improved as bond yields remained flat, signaling cautious optimism among investors.
Sri Lanka rupee shows resilience as bond yields stabilize after recent decline
The Sri Lanka rupee opened trading on Thursday at 304.45/55 to the US dollar in the spot market, hovering around the same levels recorded the previous day. The currency’s performance follows a gradual depreciation from 302.55 earlier this month, reflecting subtle pressures in the foreign exchange market.
Despite this mild weakening, analysts note that the rupee has shown a remarkable degree of stability in recent weeks. The Central Bank of Sri Lanka (CBSL) has refrained from excessive liquidity injections, limiting money printing through open market operations. Instead, the bank is supplying liquidity solely for clearing purposes at the ceiling rate — a move designed to push commercial banks toward using real deposits for credit expansion rather than relying on artificial funding sources.
This tighter monetary environment has nudged short-term interest rates upward, helping to support the rupee by discouraging non-deposit-based credit. Meanwhile, long-term bond yields have edged slightly lower, a trend attributed to Sri Lanka’s improving fiscal performance and growing investor confidence in government securities.
However, market observers caution that the central bank’s occasional interventions could introduce volatility. The CBSL has been known to purchase dollars from private sellers, thereby injecting liquidity into the system. But when this unsterilized liquidity is not absorbed and eventually fuels imports through new credit, it can create fresh pressure on the exchange rate.
A depreciating Sri Lanka rupee carries significant fiscal implications. Each drop in value increases the cost of fuel and energy imports, swelling losses in state-run utilities. Moreover, depreciation raises the cost of foreign debt servicing, straining government budgets that are already stretched by high expenditure demands. Economists warn that unchecked currency weakness could offset recent gains in fiscal consolidation and inflation management.
Sri Lanka’s economic history offers sobering lessons. Since the 1980s, successive currency depreciations — compounded by structural reforms linked to IMF programs — have periodically destabilized public finances. Analysts argue that the cost of depreciation is often underestimated because it is not directly accounted for in budget deficit calculations. Prior to the era of aggressive monetary policy interventions, currency declines were relatively rare, but the advent of money printing and policy-rate targeting in the mid-20th century ushered in a new age of inflation and volatility.
On Thursday, the government securities market reflected subdued activity, with yields broadly flat after recent declines.
A bond maturing on December 15, 2026, was quoted at 8.20/30 percent, closing at 8.20/28 percent compared to 8.25/30 percent on Wednesday. The 2027 maturity traded between 7.75/85 and closed at 8.75/83 percent, down from 9.12/15 percent the previous day.
Similarly, the 2028 bond saw mild gains, closing at 9.10/17 percent, down slightly from 9.18/25 percent earlier. The 2028 December issue remained unchanged at 9.60/65 percent, while the 2030 bond eased to 9.73/78 percent from 9.75/78 percent. Longer-tenor bonds, including those maturing in 2031, 2032, and 2033, also reflected marginal declines in yield, indicating subdued trading volumes and sustained investor confidence.
Market participants interpret this calm as a sign that Sri Lanka’s macroeconomic stabilization efforts are taking hold. The government’s continued focus on fiscal discipline, combined with a restrained monetary policy stance, is helping restore equilibrium in the foreign exchange and bond markets. Still, economists emphasize that sustained progress will depend on maintaining policy consistency and avoiding politically driven interventions.
The CBSL’s decision to avoid fresh liquidity injections marks a departure from past practices that often fueled inflationary pressures and exchange rate depreciation. This shift toward a more orthodox approach — anchored on real deposit-based lending and prudent liquidity management — could enhance confidence in the Sri Lanka rupee over the medium term.
Nevertheless, external factors remain crucial. Global oil prices, investor appetite for emerging market debt, and geopolitical developments all influence Sri Lanka’s external position. With reserves gradually rebuilding and inflation moderating, the rupee’s near-term outlook appears cautiously positive, though structural vulnerabilities persist.
For now, the rupee’s ability to hold its ground at around 304.50 to the US dollar underscores both resilience and fragility — a reflection of steady but delicate market balance.