Before the stock market opened, the island nation's central bank kept key monetary policy rates unchanged for a fourth straight month, as expected, but left the door open for easing later as inflation is expected to slow further.
The main stock index gained 0.22 percent, or 12.80 points, to 5,852.58, its highest close since Jan. 28.
Japan-based Bansei Securities Co Ltd bought 44.2 million or 15 percent stake in Pan Asia Banking Corp Plc at 21 rupees each, stockbrokers said. The small-cap banking share, however, ended 5.6 percent down at 20.30 rupees.
Analysts said foreign buying in the second largest lender Hatton National Bank Plc, which jumped 4.5 percent, boosted the overall index on Tuesday.
Expectations of falling interest rates have boosted sentiment, after Treasury Secretary P.B. Jayasundera last week said Sri Lanka's interest rates should fall in May-June as the borrowing needs of loss-making state energy companies recede.
Foreign investors, who accounted for the day's 84.5 percent of the total buying, were net buyers of 637.9 million rupees worth of shares, extending the year-to-date net foreign inflow to 7.09 billion rupees ($56.54 million). Last year, the bourse saw a net inflow of $303 million.
The turnover was at 1.58 billion rupees, more than this year's daily average of about 1 billion rupees.
The rupee edged down to 125.41/45 to the dollar, from Friday's close of 125.30/35, its highest since April 9, 2012 due to importer demand for dollars in thin trading volume, currency dealers said.
Both currency and stock market were closed for a special holiday on Monday in lieu of the traditional new year holiday falling on a Sunday.
The rupee has been on the rise since mid-March on inflows from remittances and exporter dollar sales ahead of the traditional new year, which most Sri Lankans celebrated on April 13 and April 14.
Currency dealers expect the rupee to appreciate further in the coming weeks due to an expected inflow of $500 million from a bond sale by state-run Bank of Ceylon. ($1 = 125.4000 Sri Lanka rupees) (Reporting by Shihar Aneez; Editing by Anand Basu)