Sri Lanka rupee bonds recorded their highest level of foreign ownership in over two years after strong offshore buying, highlighting renewed investor confidence despite global uncertainty and currency depreciation.
Sri Lanka rupee bonds attract sustained offshore investor inflows
Foreign holdings in Sri Lanka government securities climbed to a 27-month high last week, driven by sustained offshore investor interest in rupee-denominated bonds, according to data released by the Central Bank of Sri Lanka.
Foreign investors purchased a net 6,632 million rupees worth of government securities during the week ending January 29, equivalent to approximately $21.5 million at prevailing exchange rates. This marked the 15th week of net foreign buying in the past 22 weeks, underscoring a steady return of offshore capital to the domestic bond market.
The renewed inflows followed two consecutive weeks of modest selling, during which foreign investors offloaded a net 1,398 million rupees in rupee bonds. Despite this brief pause, overall sentiment has remained constructive, with cumulative foreign inflows reaching 5,191 million rupees, or nearly $16.9 million, in the first four weeks of January alone.
As a result of the latest purchases, foreign holdings in Sri Lanka rupee bonds have risen to their highest level since November 1, 2023, reflecting improving confidence in the island nation’s macroeconomic stability and monetary policy direction.
Globally, investor sentiment has remained cautious amid expectations of potential interest rate cuts by the United States Federal Reserve. Uncertainty has been heightened following U.S. President Donald Trump’s announcement of former Federal Reserve Governor Kevin Warsh as his nominee to lead the central bank. Warsh is widely viewed as favouring lower interest rates, a stance that could reshape global capital flows.
Historically, easing monetary policy in the United States has triggered a reallocation of capital away from dollar-denominated assets toward higher-yielding or alternative investments, including emerging market debt. Such shifts tend to benefit frontier and emerging economies like Sri Lanka, where yields remain relatively attractive despite currency risks.
Analysts note that expectations of lower U.S. interest rates often reduce the appeal of safe-haven assets, prompting investors to seek returns in markets offering yield differentials. Sri Lanka’s rupee bond market, supported by stable policy rates and contained inflation, has emerged as a beneficiary of this trend.
In 2025, Sri Lanka recorded total foreign inflows of approximately 71.5 billion rupees, or around $234.4 million, into rupee-denominated government securities. These inflows came despite intermittent volatility in global markets and concerns surrounding trade policy shifts.
The country experienced a brief period of capital outflows in early April last year, when foreign investors withdrew roughly 10.1 billion rupees following tariff-related announcements by the U.S. administration. The rupee weakened in the aftermath of those developments, reflecting broader risk aversion across emerging markets.
However, analysts say Sri Lanka’s deflationary policy stance and import controls have helped stabilise external balances, supporting a gradual return of foreign capital. Reduced import demand has eased pressure on foreign exchange reserves, while tighter fiscal and monetary coordination has improved investor perceptions of policy credibility.
The Central Bank of Sri Lanka has kept its key policy rates unchanged since May last year, following a cumulative reduction of 825 basis points over a 24-month period. The pause in easing has provided greater visibility for investors, even as the local currency continued to depreciate moderately.
Despite rupee weakness, foreign investors have continued to accumulate government securities, signalling confidence in real yields and medium-term macroeconomic prospects. Market participants note that consistent policy signals and progress under the International Monetary Fund-backed reform programme have played a role in sustaining inflows.
Looking ahead, analysts expect foreign participation in Sri Lanka’s bond market to remain sensitive to global interest rate trends and domestic policy discipline. Continued stability in inflation, fiscal consolidation, and reserve accumulation will be key factors influencing the durability of offshore investor interest.