ECONOMYNEXT – Sri Lanka’s interbank rates eased over the week, with call money and gilt-backed repo rates falling in tandem, data showed, which is usually indicative of slowing private credit.
The central bank bought more than 20 million US dollars in the market, market participants said, preventing an appreciation of the rupee as the country recovers from cyclone Ditwah.
Weighted average call money rates, which were around 8.04 percent in December 2025 fell to 7.79 percent by January 22, central bank data showed.
Gilt backed repo rates which went up to as much as 8.10 percent by end December, fell to 7.80 percent, by January 22.
Treasury bill rate also went up in recent weeks amid government Ditwah relief payments.
Sri Lanka’s central bank created the independence Ceylon’s first balance of payments crisis by controlling Treasury bill yields.
Falling rates are indicative of a slowdown in credit.
A big natural disaster has tended to trigger a slowdown in credit in the past, which then leads to an appreciation of the currency if the central bank allows it.
The rupee appreciated sharply after the December 2004 tsunami as the central bank allowed it.
Not Market Determined
However, after the cyclone Ditwah the central bank has been buying dollars heavily in the market, preventing an appreciation.
On January 2022, authorities bought over 20 million dollars from banks around 309.80 to the US dollar, market participants said, preventing an appreciation.
When the central bank buys dollars in the market, new money is created, in what the founding governor of the central bank called the ‘monetization’ of a balance of payments surplus.
A balance of payments surplus is made possible by better monetary policy from the issue department (now called market operations), operating a scarce reserve regime and also the payment of coupon interest on the central bank’s bond portfolio.
However, exchange rate policy has undermined gains on better monetary policy and is threatening to undermine the current administration’s economic program, including in bringing down electricity costs.
Since people are living in difficulties due to the central bank’s past flawed monetary and exchange rate policies which led to a collapse in the currency and an instant rise in poverty, analysts have warned that it will be easy to create social unrest by pushing up energy and food prices.
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Sri Lanka’s central bank has depreciated the rupee from 4.70 to 310 to US dollar since it was created.
Most of the depreciation come after 1980, as attempts were made to target money supply without floating exchange rate, shattering government finances and triggering social unrest, discrediting and undermining economic reforms.
Monetary instability worsened after the end of a civil war, as money was printed to boost growth under so-called flexible inflation targeting potential output targeting, eventually leading to an external sovereign default. (Colombo/Jan22/2026)
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