Monday Feb 02, 2026
Monday Feb 02, 2026
Monday, 2 February 2026 00:25 - - {{hitsCtrl.values.hits}}
The Central Bank of Sri Lanka (CBSL) allowed money markets to operate amidst a persistent liquidity surplus in the financial system through 2025, even as short-term interest rates drifted above the policy signal in the second half of the year, according to the Market Operations Report – December 2025.
Central Bank liquidity remained in surplus throughout the year, ending 2025 at Rs. 175.2 billion, compared to Rs. 168.1 billion a year earlier. The report said the surplus was “mainly supported by net foreign exchange operations of the CBSL with banks,” with foreign exchange purchases and swap transactions injecting significant rupee liquidity into the system.
On average, the liquidity surplus declined in the second half of the year to Rs. 119.2 billion from Rs. 154.6 billion in the first half, reflecting absorption through Government foreign loan repayments, currency withdrawals, and coupon payments on Treasury Bonds held by the CBSL.
Despite the surplus, short-term interest rates diverged from the policy signal from mid-July 2025. The report noted that while the Average Weighted Call Money Rate (AWCMR) “largely hovered around the Overnight Policy Rate (OPR) during the first half of 2025,” a divergence emerged in the second half due to “tighter liquidity conditions and concentration of liquidity within certain banks.”
As at end-2025, the AWCMR stood at 8.04%, compared to the OPR of 7.75%. The CBSL stated that “as this deviation was considered tolerable, the CBSL refrained from providing additional liquidity to tame the uptick in short-term rates,” with the AWCMR realigning with the OPR in January 2026.
The report highlighted persistent asymmetry in liquidity distribution. “A larger share of liquidity was concentrated with the main foreign banks,” while liquidity at State banks declined in the latter part of the year due to increased Government funding requirements linked to Cyclone Ditwah relief measures.
Domestic private banks recorded some improvement, while liquidity positions of Standalone Primary Dealers improved compared to 2024 but remained “in a marginal deficit” on average.
In the absence of Open Market Operations (OMOs), banks relied more heavily on interbank activity. The CBSL said that “with the CBSL not readily providing liquidity through OMOs, banks traded more actively in the call and the repo markets,” with call and repo market activity increasing, and call market volumes rising above pre-crisis levels.
Throughout 2025, the CBSL refrained from conducting OMOs, stating that “the CBSL refrained from conducting OMOs since end-January 2025 given the persistent liquidity surplus in the domestic money market.”
Standing facilities continued to play a role in day-end liquidity management. The average amount accepted under the Standing Deposit Facility rose to Rs. 140.9 billion in 2025 from Rs. 134.4 billion in 2024, reflecting continued excess liquidity placements, particularly by foreign and State banks.
CBSL Governor Dr. Nandalal Weerasinghe last week said that recent short-term volatility in interbank rates reflected temporary liquidity shortages in parts of the banking system and had since corrected without CBSL intervention. He said rates had realigned with the OPR and that this correction would transmit to Treasury Bills, Bonds, and prime lending rates.
