Foreign investors are staging a notable comeback in Sri Lanka’s rupee-denominated Government securities market, signaling a gradual but meaningful restoration of confidence in the country’s macroeconomic trajectory.
Holdings of Treasury instruments by offshore investors have surged 109.3% year-on-year and 15.47% year-to-date, climbing past Rs. 160 billion to mark a near 30-month high. The decisive uptick reflects a reassessment of Sri Lanka’s risk-return profile by global funds at the start of 2026, as improving macroeconomic indicators and relatively attractive yields drew fresh allocations.
According to Wealth Trust Securities, foreign participation crossed the Rs. 160 billion threshold this week, coinciding with exceptionally high money market liquidity. Surplus liquidity in the banking system stood at Rs. 299 billion the highest level in over 11 years while Treasury bill rates declined for a fourth consecutive week. Secondary market bond yields also continued their downward trend, underscoring growing demand for government paper.
The renewed appetite appears driven by a combination of yield compression in developed markets and Sri Lanka’s stabilising macroeconomic outlook. Investors are gravitating particularly toward medium-duration Treasury bonds, where nominal yields remain elevated relative to regional peers. For global portfolio managers hunting carry opportunities, Sri Lanka’s government securities offer a compelling spread—provided policy discipline and exchange rate stability are sustained.
This rebound in foreign exposure, though impressive in percentage terms, still leaves holdings below pre-crisis peaks. That gap suggests additional headroom for inflows if reform momentum and macro stability continue.
The simultaneous rise in foreign holdings and system liquidity reflects deeper monetary dynamics. When offshore investors convert dollars to purchase rupee-denominated securities, the Central Bank of Sri Lanka typically absorbs the foreign exchange to bolster reserves. This process injects rupee liquidity into the domestic banking system, amplifying surplus conditions.
Liquidity has been further supported by multilateral inflows. A recent $206 million disbursement under the International Monetary Fund’s Rapid Financing Instrument has strengthened gross official reserves. While such inflows initially accumulate as foreign assets, their eventual conversion into rupees for fiscal spending adds to domestic liquidity once deployed.
The alignment of falling yields, abundant liquidity, and renewed foreign buying suggests that portfolio flows may be acting as an early barometer of confidence in Sri Lanka’s policy direction. Investors appear increasingly comfortable that inflation is moderating, fiscal reforms are progressing, and external buffers are being rebuilt.
However, sentiment remains conditional. Sustained inflows will depend on continued fiscal consolidation, reserve accumulation, and exchange rate stability. Any reversal in global risk appetite or domestic reform momentum could temper enthusiasm.
For now, the data points to a cautiously optimistic narrative: Sri Lanka’s government securities market is regaining credibility in the eyes of foreign investors, and portfolio flows are once again tilting in its favour.