The main stock index edged up 0.14 percent, or 8.42 points, to 6,210.10, the highest close since Nov. 14, 2011.
'One of the main reasons is that investors are expecting a rate cut. A lot of retailers and local high net worth investors are active,' a stockbroker said on condition of anonymity.
Analysts said they also expect a rate cut at Friday's Central Bank May Monetary policy announcement.
Shares have been on a rising trend on expectations of a fall in interest rates after Treasury Secretary P.B. Jayasundera and the central bank said interest rates could ease in May-June.
The market has gained 7.5 percent since the treasury secretary's comments on April 9.
The International Monetary Fund, however, said on Thursday Sri Lanka must not loosen monetary conditions as inflation remains a concern, even though prices had risen at a slower pace in April than in the previous month.
Shares in market heavyweight John Keells Holdings rose 2.08 percent to a record high of 270 rupees a share, Reuters data showed.
The turnover was 1.46 billion rupees ($11.55 million), more than this year's daily average of 1.01 billion rupees.
Foreign investors were net sellers of 92.1 million rupees of shares, the first outflow in the last eight sessions. However, they have been net buyers of 9.12 billion rupees so far this year. Last year, the bourse saw a net inflow of $303 million.
The rupee ended at 126.05/08 per dollar, firmer from Tuesday's close of 126.30/37, on exporter dollar sales amid a tight rupee liquidity in the market, currency dealers said. ($1 = 126.4150 Sri Lanka rupees)
(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Anupama Dwivedi)
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