At the upcoming policy meeting of the Monetary Board of the Central Bank of Sri Lanka (CBSL), there is a robust case for an increase in policy rates in order to compensate for heightened political risk and to preserve the currency and foreign reserves, says First Capital Research.

They believe there is a higher probability of 60% for a hike to iron out the prevailing imbalances in the domestic financial markets and the external sector of the economy, while preempting the buildup of any excessive inflationary pressures over the medium term, thereby supporting macroeconomic stability.

Considering the recent developments and higher interest rate expectations by the market participants as reflected at previous bill and bond auctions, they believe there is a greater prospect that CBSL might opt to go for a fairly large increase in policy rates such as 300bps.

However, the research outfit says there is also a lower probability of 40% to maintain the policy rates at its current level in order to improve the high frequency indicators.