CBSL buys $ 1 b from domestic market

• Move boosts reserves, liquidity and private sector credit

The Central Bank of Sri Lanka (CBSL) has in the first half of 2025 purchased $ 1 billion from the domestic market, in the process boosting reserves, liquidity, and private sector credit. 

Liquidity in Sri Lanka’s domestic money market remained in surplus throughout the first half of 2025, continuing a trend that began in April 2024. As of end-June 2025, excess liquidity stood at Rs. 138.1 billion, down from Rs. 168.1 billion at end-2024.

 The average monthly surplus during the first six months of 2025 was Rs. 154.6 billion, the CBSL said in its June 2025 Market Operations Report. 

The primary driver of liquidity injection was the CBSL’s net purchase of $ 1,014.1 million from the domestic foreign exchange market. This added Rs. 408.7 billion to market liquidity. The aim was to bolster foreign reserves, which reached $ 6.08 billion by the end of June 2025, the CBSL said.

However, liquidity was partially absorbed by other factors. These included Government foreign loan repayments totalling Rs. 231.9 billion, net currency withdrawals of Rs. 106.4 billion, coupon payments of Rs. 95 billion to the CBSL on its Treasury Bond holdings, and Treasury Bond maturities worth Rs. 6.7 billion.

In response to sustained surplus conditions, the CBSL said it halted liquidity-injecting open market operations (OMOs) from the end of January 2025. By February, all overnight and short-term reverse repo facilities, totalling Rs. 48.4 billion, were allowed to mature. The CBSL continued to provide access to the Standing Deposit Facility (SDF) and Standing Lending Facility (SLF) as needed, although reliance on these tools declined. The average SDF placements rose to Rs. 157.4 billion in the first half of 2025 from Rs. 116.7 billion in the same period of 2024. Meanwhile, SLF usage fell to Rs. 2.4 billion from Rs. 11.4 billion.

With improving liquidity among banks, interbank activity normalised. The Average Weighted Call Money Rate (AWCMR) stayed closely aligned with the Overnight Policy Rate (OPR), ending June at 7.75%. Repo market volumes increased, driven by activity from domestic private banks and standalone primary dealers (SPDs), even as call market volumes remained low. Private sector credit reached Rs. 8.6 trillion in May 2025, up 16.5% from the previous year, suggesting that liquidity was funnelled towards economic activity.

The CBSL eased monetary policy further in May 2025, cutting the OPR by 25 basis points to 7.75%. This brought the Standing Deposit Facility Rate (SDFR) and Standing Lending Facility Rate (SLFR) to 7.25% and 8.25%, respectively. The AWCMR and the Average Weighted Repo Rate (AWRR) also settled at 7.75% by the end of June. These moves followed the November 2024 transition from a dual policy rate framework to a single rate system, which improved the alignment of market interest rates with policy signals.

However, in June 2025, the CBSL was also prompted to direct banks to improve lending assistance to small and medium businesses (SMEs) impacted by the recent economic challenges. It had advised banks to provide further concessions, including interest reliefs and new lending, to affected borrowers, while the timeline given to licenced banks in Circular No. 04 of 2024 to enter into rescheduling agreements with eligible SME borrowers was extended from 15 June to 30 June 2025.

Meanwhile, on the exchange rate front, the rupee depreciated by 2.46% against the US dollar during the first half of 2025, from Rs. 292.58 to Rs. 299.97. The depreciation was driven by capital outflows, seasonal dividend payments, increased import demand, and external factors such as reciprocal tariffs announced by the US and Middle Eastern geopolitical tensions. To prevent excessive volatility, the CBSL intervened in the foreign exchange market, absorbing $ 1,077.4 million and supplying $ 63.3 million.

To support reserve accumulation and manage forex liquidity, the CBSL conducted buy-sell swap transactions totalling $ 868 million and rolled over swaps worth $ 520 million during the first half of 2025. Maturing swaps amounted to $ 503.5 million. The outstanding balance of buy-sell swaps rose to $ 1.68 billion by the end of June, up from $ 1.32 billion at the end of 2024.

Meanwhile, the domestic foreign exchange market showed signs of increased activity and confidence. The average daily interbank forex trading volume rose to $ 81.5 million in the first half of 2025, up 17.3% from $ 69.5 million in the same period of 2024. Spot, Tom, and Cash transaction volumes also increased by 16.1%, averaging $ 54.2 million per day compared to $ 46.7 million a year earlier.

To improve transparency and price discovery in the foreign exchange market, the CBSL, in partnership with Bloomberg, introduced the Foreign Exchange Matching (BMatch) Platform. The system enables anonymous, real-time quotes for spot transactions and allows the CBSL to monitor market dynamics more effectively.

The CBSL maintained its flexible inflation targeting (FIT) framework and flexible exchange rate regime during the first half of the year, allowing market forces to determine the exchange rate. However, interventions were used selectively to manage volatility and maintain orderly market conditions, the CBSL said.

Overall, Sri Lanka’s domestic financial market showed signs of stabilisation in the first half of 2025, supported by improved liquidity, easing interest rates, steady foreign reserve accumulation, and enhanced market functioning. The Central Bank is expected to continue closely monitoring monetary and exchange rate developments while adjusting operations in line with evolving conditions.