The main share index closed 0.72 percent, or 40.79 points firmer, at 5,683.79, its highest close since Oct. 12, Reuters data showed.
Analysts said the positive sentiment was due to easing interest rates and a rosy central bank outlook for 2013.
Treasury bill yields eased between 9-33 basis points to nine-month lows at a weekly auction, in line with a surprise cut in interest rates last month.
The central bank in its policy announcement relaxed restrictions on foreign exchange trading with effect from Wednesday including a three-month limit on forward booking and it raised commercial banks' net opening positions.
The central bank also said it expected a 7.5 percent economic growth in 2013, while it will maintain a flexible exchange rate for the rupee.
Shares of Commercial Bank of Ceylon, which accounted for 85 percent of the day's turnover of 1.68 billion rupees ($13.16 million), rose 0.97 percent to 104 rupees.
Foreign investors were net sellers of 17.15 million rupees worth of shares after being net buyers of a record 38.63 billion rupees worth shares last year.
The rupee closed firmer at 127.40/45 to the dollar compared with Tuesday's close of 127.70/75, on bank selling, dealers said.
Sri Lanka Forex Association, a body which represents currency dealers, welcomed the central bank moves to boost foreign exchange trade. ($1 = 127.7000 Sri Lanka rupees)
(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Robert Birsel)
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