Sri Lanka PM Wickremesinghe's reinstatement calms markets; cabinet in focus

COLOMBO (Reuters) - The Sri Lankan rupee strengthened on Monday while bond yields dropped as a seven-week political crisis appeared to ebb after President Maithripala Sirisena reinstated the premier he had initially sacked in a widely criticized move.

Slideshow ( 2 images )

Ranil Wickremesinghe, who was sworn into office on Sunday, held discussions with Sirisena about forming a cabinet and restoring stability in the island nation of 21 million people just off the southern coast of India.

Wickremesinghe’s reinstatement, which is expected to end a political crisis that began in late October when he was surprisingly sacked, is seen as an embarrassment for the president.

Yields on Sri Lanka’s dollar bonds due in 2022, which had risen more than 1 percent since the crisis started in October, fell 40 basis points to 7.6 percent. The rupee edged up to 179.60 per dollar from Friday’s close of 179.90/180.10.

“The market has taken Wickremesinghe’s appointment positively. But investors will have to wait and watch whether the president and prime minister will get along with each other,” a currency dealer said, requesting anonymity as he was not authorized to speak to media.

Sirisena had replaced Wickremesinghe with former President Mahinda Rajapaksa following differences over policy matters and other issues. However, Rajapaksa failed to win a parliamentary majority and resigned on Saturday as a government shutdown loomed.

Sirisena had repeatedly said he would not reappoint Wickremesinghe as prime minister. However, he had to change his stance to gain parliamentary approval for a temporary budget that is required by Jan. 1.

Preparations for a vote on account will begin as soon as Wickremesinghe names a finance minister, treasury secretary SR Attygala said.

The vote on account has become mandatory after parliament approval for the budget for 2019 (Jan-Dec) was derailed following Wickremesinghe’s ouster in October.

Sri Lanka’s stock market index held steady at 0800 GMT, while analysts said cautious investors were buying risky assets before the cabinet appointments are announced.

Reporting by Shihar Aneez; Editing by Sanjeev Miglani and Sherry Jacob-Phillips