The island nation's central bank head on Friday said the monetary authority is to issue guidelines to direct banks to cut lending rates and narrow the gap with the inflation rate, after it kept the key policy rates unchanged.
"Expectations of market interest rates falling further boosted sentiment," a stockbroker told on condition of anonymity. "We expect the market lending rates to fall from this week despite the central bank holding the rates flat."
The main stock index rose 0.54 percent, or 33.85 points, to 6,341.28, edging up from its lowest close since May 16.
Foreign investors were net buyers of shares for a 22nd straight session. The bourse saw a net foreign inflow of 357.6 million rupees ($2.83 million), extending the year-to-date inflows to 15.96 billion rupees.
They accounted for around 56.92 percent of the day's turnover of 825.9 million rupees, less than this year's daily average of 1.04 billion rupees.
Shares in conglomerate John Keells Holdings rose 2.94 percent to 272.80 rupees.
The rupee ended weaker at 126.55/60 per dollar from Friday's close of 126.45/50 on demand for greenbacks from importers, dealers said.
($1 = 126.3500 Sri Lanka rupees)
(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Subhranshu Sahu)