Continued foreign buying also boosted sentiment.
The main stock index rose 0.22%, or 14.77 points, to 6,742.56, its highest close since 3 October 2011.
Yields in Treasury bills fell further at the Wednesday’s weekly auction.
“Though we don’t see a galloping market, it will be stable and positive,” said Hussain Gani, Deputy CEO at Softlogic Stockbrokers.
The Central Bank on Monday kept policy rates steady at multi-year lows for a sixth straight month, as expected, despite private sector credit growth slowing to a 4-1/2-year low.
The index is in the overbought region since 3 July as it has gained 5.71% so far this month, Thomson Reuters data showed.
Analysts said the profit-taking in the mid cap shares and penny stocks was overshadowed by the gains in large cap shares.
Turnover was Rs. 1.21 billion ($ 16.82 million), more than this year’s daily average of about Rs. 1.09 billion. Foreign investors accounted for 37.4% of the day’s turnover.
Foreign investors were net buyers of Rs. 326.3 million worth of shares on Wednesday, extending net foreign inflows in stocks to Rs. 9.79 billion so far this year.
Tuesday’s gains were led by Carson Cumberbatch, which rose 2.27% to Rs. 460.20 and Bukit Darah Plc, which gained 3.75% to Rs. 700.
Shares in the market heavyweight John Keells Holdings gained 1.03% to close at Rs. 244.90.
Lower interest rates have prompted local investors to buy shares and shift their savings from unattractive fixed assets, analysts said, as yields on Treasury bills edged down further at a weekly auction on Wednesday.
Analysts said foreigners have been buying risky assets because they see value in them, while falling yields in fixed assets gradually prompt local investors to shift to equities.
The market has been on a rising trend since late February due to continued foreign buying and lower interest rates.