CBSL Restores Interbank Liquidity to Prevent FX Market Distortions

The Central Bank of Sri Lanka (CBSL) announced that the foreign exchange market has normalized following targeted actions to reactivate the interbank market, which had frozen due to panic-driven dollar demand. Key Developments & Market Figures • Rate Divergence: During the volatility, the interbank rate rose from Rs. 320 to Rs. 330. However, customer transaction rates detached significantly from underlying pricing, spiking as high as Rs. 346 and Rs. 354. • Liquidity Surge: Excess liquidity in the banking system grew from Rs. 175.20 Bn at end-2025 to Rs. 280.75 Bn by late February 2026, driven by CBSL's reserve rebuilding. To counter this, CBSL has been absorbing excess liquidity via overnight and short-term operations since late April. • Economic Buffers: Despite recent currency pressures, macroeconomic indicators remain stable based on provisional data, with gross official reserves holding above US$ 7.00 Bn and April inflation at 5.4%. Market Dynamics & Policy Response • Speculative Distortions: The breakdown occurred as panicked importers rushed to secure dollars, exporters delayed conversions, and banks retained inflows exclusively for their own clients instead of trading between themselves. • Policy Tightening: The CBSL shifted to a tighter monetary policy to curb demand-side pressures. This decision was driven by strong domestic credit growth, rising import demand, and worsening external supply risks linked to the Middle East conflict. • Future Outlook: CBSL stated its direct currency intervention remained minimal (limited to a small smoothing operation). The Governor emphasized that as long as interbank trading remains active, further distortions are unlikely, though tools like moral suasion remain available if volatility returns.