ECONOMYNEXT – Sri Lanka’s rupee opened at 307.90/308.00 to the US dollar in the spot market Friday, stronger from 308.10/30 the previous day, dealers said, but sharply depreciated from 305.50/306.00 a week earlier, while bond yields were broadly steady.
Sri Lanka rupee had depreciated from 292.58 in December 2024, amid record current account surpluses and sharply reduced budget deficit.
Macro-economists had in the past blamed both current account deficits and budget deficits for currency troubles.
Macro-economists in the past have blamed oil, cars and gold imports as well as exiting rupee bond holders for currency depreciation after cutting rates and boosting private credit, usually with inflationary open market operations as well.
Analysts had warned that the rupee would depreciate under the so-called flexible exchange rate, a regime found in defaulting crisis that gives excessive discretion to monetary authorities to destabilize currencies and push up inflation as soon a private credit recovers from the previous currency crisis triggered by rate cuts.
Over 2025 central bank has bought dollars (strong side convertibility) which indicates that the agency has not lost control of the currency due to inflationary policy and is operating some deflationary policy at least on some months.
Coupons paid on central bank held bonds, actual bond sales in the portfolio, and dollar bought at a lower price and sold to the government after depreciation, any unwound buy0sell swaps is deflationary.
But the depreciation is taking place due to selective or restricted weak side convertibility where dollars were returned for unsterilized rupees only to the government, analysts have pointed out.
Steady depreciation then triggers confidence shock, which may ease if credit slows.
RELATED : What is wrong with Sri Lanka’s flexible exchange rate
A bond maturing on 15.03.2028 was quoted flat at 9.00/05 percent.
A bond maturing on 15.12.2029 was quoted at 9.48/50 percent, up from 9.47/50 percent.
A bond maturing on 01.07.2030 was quoted at 9.55/60 percent, up from 9.57/59 percent.
A bond maturing on 15.12.2032 was quoted at 10.24/28 percent, from 10.23/30 percent.
The Colombo Stock Exchange opened down; The ASPI was down 0.15 percent, or 35.28 points, at 23,069; the S&P SL20 was down 0.04 percent, or 2.86 points, at 6,379.
The telegraphic transfer rates for the American dollar was 304.5000 buying, 311.5000 selling; the British pound was 397.2716 buying, and 408.6334 selling, and the euro was 348.9353 buying, 360.2985 selling.
Sri Lanka rupee has depreciated steeply over 2025, despite record current account surpluses, which macro-economists usually blame for currency trouble.
Sri Lanka’s central bank has also injected liquidity via dollar buy-sell swaps over 2025, but not returned dollars to private parties after the liquidity turned into domestic credit and imports.
The rupee fell as budget deficits also contracted dramatically. Sri Lanka’s central bank had blamed budget deficits for external trouble from 1952 after suppressing rates with liquidity injections.
Analysts had blamed dollar purchases by the central bank and unsterilized excess liquidity and the refusal to return dollars to importers after private credit drove up imports under a so-called flexible exchange rate.
The ‘flexible exchange rate’ along with ‘flexible inflation targeting’ gives excessive discretion to central banks with an inflation bias.
The flexible exchange is based on a rejection of classical economic principles analysts have warned and can depreciate through excessive dollar purchases by the central bank even if control of the peg is retained through some deflationary policy.
RELATED : What is wrong with Sri Lanka’s flexible exchange rate
Under flexible or discretionary policy, the most dangerous time for monetary stability in the country had been an economic recovery and accelerating private credit.
Until the IMF’s Second Amendment central banks – including in Sri Lanka – were generally barred from depreciating.
Sri Lanka’s central bank has missed its 5 percent inflation target with largely deflationary policy (except for buy-sell dollars swaps) but it can push up prices of energy and food commodities by depreciating the currency and put pressure on companies, family finances and state enterprises. (Colombo/Nov21/2025)
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