The Central Bank of Sri Lanka (CBSL) has dramatically changed the character of its foreign-exchange intervention, emerging as a powerful net buyer of dollars at a time when the rupee is showing signs of renewed stability.
The CBSL purchased a record US$579 million from the domestic foreign-exchange market in August, the highest monthly purchase recorded since January 2025. The scale of accumulation is significant because it represents a sharp departure from the intervention pattern that characterised Sri Lanka’s previous balance-of-payments crises.
During earlier crises, the Central Bank was frequently forced to sell dollars from its reserves to defend the rupee. Such intervention temporarily contained depreciation but steadily drained the country’s foreign-exchange buffers, eventually leaving the currency exposed when the Central Bank’s capacity to intervene was exhausted.
The latest figures suggest a markedly different dynamic.
The August purchase exceeded the previous 2026 monthly high of US$461 million in February and was substantially above the US$356 million purchased in August 2025. With August included, the CBSL’s net foreign-currency purchases during the first eight months of 2026 exceeded US$1.48 billion, compared with approximately US$2 billion accumulated during the entire year of 2025.
But the figures also expose the extent of pressure the rupee endured before this turnaround.
At the end of February, the rupee had recorded a marginal 0.2% year-to-date appreciation against the US dollar. The situation changed rapidly after the escalation of conflict in the Middle East. Depreciation reached 1.6% by end-March, 2.9% by end-April and 5.4% by end-May.
By the end of June, the rupee’s cumulative depreciation had reached 7.9%, placing considerable pressure on the Central Bank and the wider external sector.
Interestingly, the CBSL did not continue defending the currency indefinitely through reserve sales. It became a net seller in April and May, selling US$12.9 million and US$211.3 million, respectively, precisely when depreciation was accelerating.
The reversal began in June, when the Bank bought US$70.5 million, followed by US$348.6 million in July and the extraordinary US$579 million in August.
At the same time, the rupee recovered considerably. Its YTD depreciation narrowed from 7.9% at end-June to 7.8% in July and then to 5.5% by end-August.
The critical question is whether this represents a durable structural improvement or merely a favourable phase in foreign-exchange conditions.
The evidence nevertheless indicates that the CBSL now possesses greater room to accumulate reserves while allowing market forces to determine the exchange rate. That is potentially crucial for preventing another reserve depletion cycle.
With the rupee’s 2025 full-year depreciation having stood at 5.6%, the 2026 experience demonstrates both the vulnerability of the currency to external shocks and the importance of having sufficient reserves to absorb them.
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