FINANCIAL CHRONICLE – For the second consecutive week, foreign investors divested from Sri Lankan rupee bonds during the week ending September 25, as reported by the Central Bank, despite a minor appreciation of the local currency.

This marks the second instance of bond sales by offshore investors within a 15-week period. In total, they liquidated rupee bonds worth a net 9.169 billion rupees (approximately US$27.8 million), bringing the total net foreign outflows to 16.5 billion rupees over the past two weeks.

Prior to these two weeks, foreign investors had been active buyers, acquiring rupee bonds worth 92 billion rupees (around US$280 million) over the previous 13 weeks. These recent outflows have decreased the foreign ownership of government securities to 196.9 billion rupees, a decline from the peak reported by the Central Bank in its Weekly Economic Indicators just two weeks prior.

Analysts noted that the recent net outflows began following the depreciation of the rupee. The selling rate of the currency had reached a near three-year low of 354 against the U.S. dollar on May 21 but saw a recovery, climbing to around 332 in the week ending September 11. Nevertheless, the rupee experienced a slight gain against the dollar last week.

Prior to the significant depreciation in May, the rupee had remained stable for over three years. The Central Bank attributed the decline to increased oil and vehicle imports amid ongoing tensions in the Middle East. As of September 25, the rupee has depreciated by 6.2 percent this year.

On a global scale, investors are exhibiting caution regarding economic growth due to the implications of the recent escalation in the Middle East. Despite this, Sri Lanka has recorded a total inflow of approximately 55.7 billion rupees into rupee bonds this year, following a net inflow of 71.5 billion rupees the previous year.

In recent months, inflation in the country has risen, largely attributed to a nearly 50 percent increase in fuel prices. The government has implemented two fuel price reductions in late June and August. To combat inflationary pressures stemming from increased demand, the Central Bank raised its key monetary policy rate by 100 basis points in May.

Prior to this rate hike in May, the Central Bank had maintained its key policy rates since May 2025 after reducing them by 825 basis points over a 24-month period starting in June 2023. During this time, foreign investors continued to purchase rupee bonds despite the minor depreciation of the local currency.