Wednesday Jun 17, 2026
Wednesday Jun 17, 2026
Tuesday, 16 June 2026 04:01 - - {{hitsCtrl.values.hits}}
After weeks of criticism from MPs over the recent depreciation of the rupee, Central Bank of Sri Lanka (CBSL) Governor Dr. Nandalal Weerasinghe last week used a Parliamentary briefing to defend the country’s exchange rate policy framework and explain the factors behind the currency’s recent weakness.
Presenting to legislators, the Governor stressed that Sri Lanka’s Flexible Inflation Targeting (FIT) framework, established under the CBSL Act, requires the implementation of a flexible exchange rate regime under which the exchange rate is primarily determined by market forces rather than fixed by the CBSL.
According to a presentation made to Parliament, the rupee depreciated by 8% against the US dollar between end-2025 and 9 June 2026, reaching Rs. 336.82 per dollar.
The CBSL attributed the recent depreciation pressures to a combination of higher import expenditure, particularly on fuel and vehicles, lower foreign exchange inflows from tourism, speculation by market participants, delays in the conversion of export earnings, increased foreign exchange purchases by importers seeking to hedge against expected depreciation, and foreign investment outflows from both the Government securities market and the Colombo Stock Exchange (CSE).
The Governor argued that the recent movement should also be viewed against a backdrop of broader regional pressures. The presentation noted that several peer-country currencies had come under pressure following the onset of the Middle East conflict and heightened global uncertainty.
Data presented to Parliament showed that the Sri Lankan rupee depreciated by 8% against the US dollar between end-2025 and 9 June 2026. Over the same period, the Indonesian rupiah weakened by 7.9%, the Indian rupee by 6.2%, the Nepalese rupee by 6%, the Philippine peso by 4.6%, and the Thai baht by 4.1%, while the Malaysian ringgit recorded only a marginal depreciation.
A key message of the Governor’s presentation was that the CBSL does not target a predetermined exchange rate under the FIT framework. Instead, its primary policy instrument is the policy interest rate, which is used to maintain low and stable inflation by influencing borrowing, saving, credit conditions, and aggregate demand.
Dr. Weerasinghe explained that while the CBSL can influence exchange rate movements indirectly through monetary policy and policy credibility, and directly through foreign exchange market intervention to smooth excessive short-term volatility, such interventions are constrained by the availability of foreign reserves.
The presentation noted that while domestic liquidity can be managed using the country’s own currency, foreign exchange intervention requires reserves, which are finite.
“A central bank can create its own currency, but it cannot create foreign reserves,” the Governor told lawmakers.
The presentation further outlined the rationale for exchange rate flexibility, arguing that it acts as an automatic shock absorber during periods of external and domestic stress, facilitates balance of payments adjustment, reduces the need to expend reserves defending a predetermined exchange rate, strengthens monetary policy independence, and promotes a deeper and more liquid foreign exchange market.
The Governor also argued that a transparent and market-based exchange rate mechanism ultimately strengthens market confidence and supports foreign exchange inflows.
The Parliamentary briefing came amid heightened debate over the rupee’s recent weakness and shortly before the CBSL tightened export proceeds conversion requirements. The CBSL had identified delayed export conversions and increased importer demand for foreign exchange as among the factors contributing to recent depreciation pressures in the market.
The presentation highlighted the CBSL’s position that exchange rate flexibility remains an essential component of Sri Lanka’s inflation-targeting framework and broader macroeconomic stabilisation strategy.
