Foreign Investors Continue to Pull Funds Out of Sri Lankan Government Bonds Amid Rupee Weakness
By: Isuru Parakrama
November 15, Colombo (LNW): Foreign investor confidence in Sri Lanka’s domestic debt market has come under renewed pressure, with overseas investors recording a fourth consecutive week of net selling of rupee-denominated government securities, according to the latest Central Bank figures.
During the week ending 12 November, foreign investors disposed of a net Rs. 5.447 billion worth of local currency bonds, equivalent to approximately US$16.5 million. The latest transactions bring total net foreign withdrawals from the bond market over the past six weeks to around Rs. 33.9 billion.
The continued selling indicates growing caution among international investors towards Sri Lanka’s financial assets, particularly against the backdrop of currency depreciation and concerns over the country’s economic outlook.
Despite the recent withdrawals, the overall picture for the year remains positive. Sri Lanka recorded a cumulative net foreign inflow of approximately Rs. 38.2 billion into rupee-denominated bonds up to 12 November. This follows an even stronger net inflow of Rs. 71.5 billion during the previous year.
The latest wave of withdrawals has coincided with uncertainty in international financial markets, where developments in the Middle East and concerns about global economic growth have influenced investor sentiment. Political developments in the United States and Israel have also contributed to the changing international investment environment.
Meanwhile, the Sri Lankan rupee has faced considerable pressure after maintaining relative stability for more than three years. Its depreciation accelerated in May, with the Central Bank identifying increased demand for imported fuel and vehicles, alongside geopolitical tensions in the Middle East, as contributing factors.
By 13 November, the local currency had lost approximately 6.8 per cent of its value against the US dollar since the beginning of the year.
The Central Bank subsequently moved to strengthen monetary conditions, increasing its key policy interest rate by 100 basis points in May in an effort to contain inflationary pressures and moderate excessive demand. The rupee has shown greater stability following the adjustment.
However, inflation remains a concern, with consumer prices experiencing an upward trend over the past seven months. The situation has been further complicated by a substantial increase in fuel costs, which have risen by nearly 50 per cent, placing additional pressure on household budgets and business operating expenses.
A further revision of domestic fuel prices during the final week of October has raised concerns about additional increases in transportation, production and distribution costs, potentially feeding into wider inflation.
Before the May monetary policy adjustment, the Central Bank had maintained unchanged policy rates since May 2025. This followed an extended monetary easing cycle during which interest rates were reduced by a cumulative 825 basis points over a two-year period beginning in June 2023. The lower interest rate environment had helped encourage foreign participation in Sri Lanka’s rupee bond market.
The latest developments suggest that maintaining foreign investor confidence will remain an important challenge for policymakers as they attempt to balance exchange rate stability, inflation control and economic recovery.
Although the country continues to record net foreign investment gains in local currency bonds for the year, the recent pattern of withdrawals highlights the sensitivity of overseas investors to currency movements, interest rate decisions and changing global economic conditions.
*With inputs from Economy Next
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