By: Staff Writer
November 09, Colombo (LNW): Foreign investors have continued withdrawing funds from Sri Lanka’s rupee-denominated government securities for a third consecutive week, raising fresh concerns over the sustainability of foreign portfolio investment despite a recent stabilisation and slight appreciation of the rupee.
Central Bank data showed that offshore investors recorded net selling of Rs.6,075 million (US$218.4 million) worth of Sri Lankan rupee bonds during the week ended November 5. The latest withdrawal pushed cumulative net foreign outflows from domestic government securities to Rs.28.5 billion over the preceding five weeks.
Although Sri Lanka has attracted net foreign investments of approximately Rs.43.6 billion into local currency bonds so far this year, the latest reversal raises questions about the confidence of international investors in the country’s economic recovery, currency stability and inflation outlook.
The contrast is particularly significant because the country recorded a net inflow of Rs.71.5 billion into rupee-denominated bonds last year. While the overall investment position remains positive for 2026, the recent selling trend indicates that foreign investors are becoming increasingly cautious about maintaining exposure to Sri Lanka’s domestic debt market.
The latest withdrawals also highlight the vulnerability of portfolio investments to international political and economic developments. Analysts attributed the selling pressure partly to changing global investor sentiment following the United States midterm elections, developments concerning the conflict involving Iran and uncertainty surrounding the political situation in Israel.
These developments have reinforced international market caution at a time when investors are reassessing global economic growth prospects and the potential consequences of escalating geopolitical tensions in the Middle East.
However, Sri Lanka’s domestic economic conditions may also be influencing investment decisions. The rupee has depreciated by approximately 6.7 per cent against the US dollar up to November 6 this year, despite having remained relatively stable for more than three years before experiencing a sharp decline in May.
The Central Bank has previously attributed pressure on the currency to increased demand for foreign exchange, particularly for higher oil and vehicle imports, alongside the continuing uncertainty surrounding the Middle East conflict.
Although the rupee subsequently stabilised following a 100-basis-point increase in the Central Bank’s key monetary policy rate in May, the depreciation has exposed foreign investors to potential exchange-rate losses when converting their investments and returns into dollars.
Inflationary pressures present another challenge. Consumer prices have increased during the past seven months following an almost 50 per cent increase in fuel prices. The Government’s latest fuel price adjustment during the final week of October has intensified concerns about another round of cost increases affecting transportation, electricity generation, production and household expenditure.
The Central Bank had maintained policy rates from May 2025 after reducing them by 825 basis points over the preceding 24 months from June 2023. The subsequent tightening in May reflected concerns over renewed inflationary pressures and stronger domestic demand.
The critical question now is whether the recent foreign selling represents temporary portfolio adjustments driven by international developments or the beginning of a more sustained withdrawal from Sri Lanka’s domestic debt market.
Although the annual net inflow remains positive, continued foreign investor confidence will depend on maintaining currency stability, controlling inflation, strengthening external reserves and demonstrating predictable economic and fiscal management. For Sri Lanka, the challenge extends beyond attracting foreign funds. It must ensure that short-term portfolio investments do not become another source of financial vulnerability when international conditions deteriorate or domestic economic pressures intensify.