Sri Lanka bonds see fresh foreign selling despite a rate hike, as rupee pressure, inflation fears, and global uncertainty weigh on investors.
Sri Lanka bonds saw another week of foreign selling, with investors offloading around US$14.7 million worth of government securities in the week ending June 4, Central Bank data showed, despite a 100 basis point hike in the key monetary policy rate.
Foreign investors sold a net Rs. 4,768 million, equivalent to around US$14.67 million at an exchange rate of Rs. 325 to the US dollar, during the week. With the latest weekly outflow, Sri Lanka has now recorded a total net foreign outflow of about US$65 million over the past four consecutive weeks, amid sharp depreciation pressure on the rupee.
On May 26, the Central Bank announced a 100 basis point increase in its key Overnight Policy Rate, or OPR, in a move aimed at curbing demand-driven inflation.
Analysts had expected the rate hike to slow foreign outflows from government securities. However, the rupee weakened again this week despite the monetary tightening announced the previous week.
Central Bank data showed that the rupee’s selling rate had fallen as low as 354 against the US dollar on May 21 before recovering and strengthening to the 334 level. This week, however, the currency slipped again to around the 342 level.
The rupee had remained broadly stable for more than three years before the latest depreciation. The Central Bank has cited higher oil and vehicle imports, along with the lingering conflict in the Middle East, as factors contributing to pressure on the currency.
So far this year, the rupee has fallen 7.8% through June 5.
Sri Lanka recorded a net outflow of around Rs. 19 billion from government securities during the first 22 weeks of the year, sharply reversing from a net inflow of Rs. 21.9 billion recorded in the first six weeks, according to available data.
Globally, investors have become more cautious over economic growth due to the impact of the latest escalation in the Middle East.
Last year, Sri Lanka enjoyed a total inflow of around Rs. 71.5 billion, or approximately US$234.4 million, into rupee bonds.
Analysts said Sri Lanka’s earlier deflationary policies helped attract inflows, supported by curtailed imports. However, the country has seen inflation rise over the past two months following a gradual fuel price increase of more than 40%.
The Central Bank raised its key monetary policy rate by 100 basis points to control inflationary pressure arising from higher demand.
Before this latest rate hike, the Central Bank had kept its key policy rates unchanged since May last year, after cutting rates by 825 basis points over 24 months from June 2023. During that period, foreign investors had continued buying rupee bonds despite slight depreciation in the local currency.
