Sri Lanka's Central Bank purchased US$348.6 million in July as the rupee stabilized following sharp depreciation in May, while foreign investors continued buying government securities amid improved economic conditions.

Sri Lanka's monetary authorities made significant progress in July toward rebuilding foreign currency reserves, with the Central Bank purchasing a net US$348.6 million during the month. This represents a marked shift from May, when the bank sold more than US$211 million on a net basis for the first time in 22 months, as the rupee came under severe pressure. Year-to-date, the Central Bank has accumulated US$905 million in net purchases through July 2026, building on US$2 billion in acquisitions during the previous year.

The rupee's volatility in May was driven by a spike in fuel imports following Middle Eastern tensions and continued strong demand for foreign currency to purchase vehicles. Since then, the currency has stabilized considerably, with dealers noting a slight appreciating trend since June. The Central Bank's aggressive reserve-building strategy aligns with commitments made under a US$3 billion International Monetary Fund facility and addresses upcoming debt repayments to sovereign bond holders scheduled for April 2028.

The improving rupee stability has attracted foreign investor confidence in Sri Lankan assets. Foreign investors purchased a net US$216.7 million in rupee-denominated government securities over eight consecutive weeks through August 7, bringing their total holdings to 192.9 billion rupees, described as the highest figure the Central Bank has recorded. Additionally, official remittances from overseas workers rebounded 11.5 percent to US$777.6 million in July after declining in June, suggesting that exchange rate certainty encourages formal money transfer channels over informal methods.

Domestic equity markets have also reflected improved sentiment, with the Colombo Stock Exchange benchmark All Share Price Index showing modest gains in early August. The stabilization in macroeconomic conditions follows the Central Bank's May decision to raise its key policy rate by 100 basis points to address inflationary pressures, though inflation has begun rising after fuel price adjustments earlier in the year.