ECONOMYNEXT – Sri Lanka’s central bank has bought only 45.5 million US dollars from forex markets in October 2025, as private credit surged, amid excess liquidity and lower interest rates, driving imports, official data shows
The central bank has bought 1,461 million US dollars up to October 2025, compared to 2,061 million US dollars, last year.
Analysts had warned that due to insufficient deflationary policy, the central bank will not be able to retain the dollars that it bought, keeping excess liquidity high and driving up private credit.
The only deflationary policy in 2025 came from Treasury coupon payments on the central bank’s bond portfolio.
Authorities had also depreciated the rupee in 2025, despite historical high current account surpluses (coming from debt repayments or net outflows from the financial account), by buying dollars from private citizens and not returning them on days that demand for dollars exceeded inflows, making the rupee depreciate and delivering a confidence shock to market participants, analysts have pointed out.
Selectively dollars were returned for state debt repayments (unsterilized interventions), mopping up or redeeming some notes created to buy dollars, preventing a further depreciation of the rupee from the excess liquidity.
However, in October the central bank bought 55 million US dollars and returned 9.5 million dollars to private citizens (defended the currency, though unsterilized interventions) helping prevent further depreciation.
There is a belief among market participants that 305 to the US dollar is the lower limit of the rupee.
Before the primary goals of the central bank was amended under then Governor A S Jayewardena as a precursor to true inflation targeting, it was illegal for the central bank not to return dollars against the rupees it created as it had an obligation to preserve the ‘external value’ of the rupee.
Similar obligations were placed on central banks buy other parliaments including the British parliament on the the Bank of England. The Bank of England required a specific ‘Bank Restrictions Act’ to refused to return reserves or ‘restrict payments’ (now known as float of the currency) to holders of its notes when they asked for it. The reserves were then in gold not in foreign currency.
“When William Pitt the Younger placed a Privy Council order on the Bank of England, a now famous cartoon came into being, where an ‘old lady’ was being wooing the BoE off gold by a young man,” says ENs Economic Columnist Bellwether.
“That is how the label Old Lady of the Threadneedle Street came into being.”
President Anura Dissanayake in the course of a budget speech for 2026 said that pressure on the rupee should be controlled.
“This shows that President Dissanayake does not believe in the ‘Political Ravishment’ of the rupee.”
RELATED : Sri Lanka should control the pressure on the exchange rate: President
However after macroeconomists got control of central banks after they were nationalized and money was printed for a policy rates, currencies was systematically debased through ‘exchange rate flexibility’ or BBC policy and nominal interest rates were driven as capital was destroyed by inflation, Bellwether says.
The central bank has also engaged in dollar rupee buy-sell swaps with banks, further injecting liquidity, allowing banks to give rupee credit without rupee deposits, but instead dollar deposits, some of which were collected in earlier periods.
“An initial unsterilized purchase of dollars has a similar effect as a buy-sell swaps in that the rupees created will turn into credit,” explains Bellwether.
“To stop the money from hitting the forex market via goverment or private credit and make it a final outright purchase, the liquidity created has to be mopped up.
“Since the central bank has a domestic asset portfolio it should sell its bond or strip some coupons and sell as deep discount bonds, if the market does not want step down securities.”
“That will allow more dollars to be collected in the ensuring months.” (Colombo/Nov12/2025)
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