Foreign investors flock to Rupee bonds

Foreign investors bought a net Rs. 8.297 billion (US$25.5 million) worth of Sri Lanka rupee-denominated government securities in the week ended August 21, extending their buying streak to 10 consecutive weeks, Central Bank data showed.

The latest inflow lifted cumulative foreign purchases of government securities to Rs. 81.2 billion (US$246.3 million) since June 19.

Foreign holdings of government securities consequently rose to Rs. 202.5 billion, the highest level recorded in the Central Bank’s Weekly Economic Indicators. Central Bank officials, however, noted that the figure may not represent an all-time record, as foreign holdings fluctuate daily in response to market and economic conditions.

Analysts attributed the renewed foreign interest partly to the relative stabilisation of the rupee. The currency, which weakened to around Rs. 354 against the US dollar on May 21, its lowest level in nearly three years, subsequently recovered to around the Rs. 333 level.

The rupee had remained relatively stable for more than three years before the sharp depreciation in May. The Central Bank attributed the pressure partly to increased oil and vehicle imports amid the ongoing conflict in the Middle East. The rupee has depreciated by 6.1% against the US dollar so far this year through August 21.

Sri Lanka has recorded a net inflow of around Rs. 61.2 billion into rupee-denominated government securities so far this year, following a net inflow of Rs. 71.5 billion in 2025.

Analysts said Sri Lanka’s previously deflationary policy environment and restrictions on imports had contributed to increased foreign investor interest in rupee-denominated securities.

However, inflation has picked up over the past three months following a gradual increase in fuel prices, including an increase of nearly 50%.

The government subsequently reduced fuel prices in the final week of June and kept them unchanged in July.

The Central Bank raised its key policy rate by 100 basis points in May to contain inflationary pressures arising from stronger domestic demand.

Prior to the May increase, the Central Bank had maintained its key policy rates since May 2025, following cumulative rate cuts of 825 basis points over the preceding 24 months from June 2023.

Despite the rupee’s depreciation, foreign investors have continued to increase their exposure to Sri Lanka’s rupee-denominated government securities, signalling sustained interest in the local debt market.