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2026-07-15 16:44:11
[Sri Lankan Bond Market Awaits Turnaround; 2027 May See Interest Rate Inflection Point, Rupee Depreciation Pressure Remains] ⑴ Capital One Holdings maintains its medium-term outlook for Sri Lankan fixed income and equities, expecting bond yields to stabilize within the current forecast range in 2026. ⑵ Due to concerns about debt sustainability and uncertainty surrounding the pace of structural reforms, a risk premium of approximately 50 basis points will be introduced at the long end of the yield curve in the first half of 2027. ⑶ The institution forecasts an average inflation rate of around 6% in 2026. Recent central bank tightening policies have helped anchor inflation expectations, but the high-interest-rate environment will suppress economic growth and credit expansion, leaving room for interest rate cuts in the first half of 2027. ⑷ The Chief Strategist recommends that investors currently focus on short-duration allocations, which can generate substantial holding returns and capture capital gains opportunities when yields revert to the target range. (5) Regarding the interest rate path, the weighted average prime lending rate is expected to remain at 10.0%-11.0% in the second half of 2026, and is expected to fall back to 9.5%-10.5% in the first half of 2027 as GDP and credit growth slow down and liquidity improves. (6) In terms of exchange rates, the rupee is expected to fluctuate between 325 and 335 against the US dollar in the second half of 2026, and may depreciate moderately to the 335-345 range in the first half of 2027 due to external pressures and changes in foreign exchange dynamics.
