The political crisis was expected to ease after President Maithripala Sirisena reinstated Ranil Wickremesinghe, whom he had ousted in October. The country plunged into a 51-day crisis following the ouster. However, delay in appointing cabinet ministers dented sentiment, dealers said.
Political paralysis remained the main concern for investors since Sirisena abruptly sacked Wickremesinghe and replaced him with Mahinda Rajapaksa, who failed to win a parliamentary majority and resigned on Saturday as a government shutdown loomed.
Wickremesinghe sworn in as Sri Lanka's prime minister on Sunday, making a remarkable comeback weeks after being ousted by President Sirisena under controversial circumstances.
The Sri Lankan rupee strengthened in early trade on Monday, while bond yields dropped as a seven-week political crisis appeared to ebb, but investors took a cautious stance to observe whether Sirisena and Wickremesinghe could work well together.
Foreigners were net sellers of a net 333.5 million rupees ($1.85 million) worth of stocks on Wednesday. They have been net sellers of 11.7 billion rupees since the political crisis began on Oct. 26. The bond market saw outflows of about 56 billion rupees between Oct. 25 and Dec. 14, central bank data showed. *
The rupee ended at 180.50/70 per dollar, compared with 180.10/30 in the previous session.
Credit rating agencies Fitch and S&P downgraded Sri Lanka's sovereign rating early December, citing refinancing risks and an uncertain policy outlook, after Sirisena's sacking of his prime minister in October triggered the political crisis.
This year, there have been 21.1 billion rupees of outflows from stocks and 148.2 billion rupees from government securities, the latest data from the bourse and central bank showed.
The rupee had touched a record low of 180.85 to the dollar on Nov. 28. It has weakened about 4.1 percent since the political crisis began. The currency dropped 1.8 percent in November, and has lost 17.5 percent this year.
Moody's downgraded Sri Lanka on Nov. 20 for the first time since it started rating the country in 2010, blaming the political turmoil for aggravating its already problematic finances.
Five-year government bond yields have risen 55 basis points since the political crisis began, while yields on Sri Lanka's dollar bonds due in 2022, which have risen around a percentage point to 8.0 percent through Friday, fell 0.35 percent to 7.7 percent on Wednesday.
The Colombo stock index ended up 0.06 percent at 6,050.95 on Wednesday. Turnover was 3.6 billion rupees, highest since Nov. 13 and more than four times of this year's daily average of 834.1 million rupees.