Foreign investors sold a net US$44.1 million (Rs 13.66 billion) worth of Sri Lankan government securities in the two weeks ending March 31, 2026, continuing a pattern of intermittent capital outflows from the rupee bond market.
The sell-off marks the 10th week of net foreign selling out of the past 29 weeks. Total foreign holdings in rupee bonds have dwindled to just Rs 2.25 billion for the first 14 weeks of 2026, a sharp contrast to the US$234.4 million (approximately Rs 71.5 billion) in net inflows recorded for all of 2025.
Middle East Conflict Drives Caution
Market analysts attribute the selling to global investor caution linked to the ongoing Middle East conflict and a broader risk-off sentiment toward emerging market assets. The outflows echo a similar episode in April 2025, when foreign investors pulled Rs 10.1 billion (US$32 million) from rupee bonds following the Trump tariff declaration.
Rupee Under Pressure
The capital outflows come amid renewed depreciation pressure on the Sri Lankan rupee. The Central Bank has held policy rates steady since May 2025, following 24 months of cuts totaling 825 basis points.
Despite the rate stability, foreign investors who had previously purchased rupee bonds even during periods of currency depreciation appear to be reassessing their risk appetite. The shift suggests external geopolitical factors rather than domestic policy changes are driving the selldown, though sustained outflows could add further pressure to the rupee and complicate the central bank’s monetary policy stance.