Stockbrokers said they expect the index to gain further as the market sees a possible rate cut during the central bank's monetary policy rate meeting next week. The announcement is scheduled for 0200 GMT on Tuesday.
The main stock index ended up 0.3 percent, or 21.49 points, at 7,256.41, its highest closing level since June 9, 2011.
"Market is on a bullish trend on diversified and banking sector counters with a lot of foreign and institutional buying," said Dimantha Mathew, manager research at First Capital Equities (Pvt) Ltd.
"There is a possibility of a rate cut while the recent fuel price cut will ease inflation further and the government is also expecting improvement in the credit growth."
Yields on treasury bills fell 3-4 basis points at a weekly auction on Wednesday and are below the central bank's standing deposit facility rate or the rate at which the central bank mops up liquidity from commercial banks.
The cut in energy prices on Tuesday has also enthused the market.
Sri Lanka is aiming for a higher economic growth of 8.2 percent and a lower fiscal deficit target of 4.4 percent of gross domestic product next year, a government document showed on Thursday.
The index has gained 22.72 percent so far this year.
The bourse has been in an overbought region since July. The Relative Strength Index, a momentum indicator tracked by chartists, rose to 85.259 on Monday compared with Friday's 83.442, Thomson Reuters data showed.
Shares in Hemas Holdings Plc, which led the overall gain in the index, rose 6.10 percent to 62.6 rupees, while Ceylon Theatres Plc jumped 6.19 percent to 169.90 rupees.
Shares in Dialog Axiata Plc rose 1.8 percent to 11.30 rupees and Hatton National Bank Plc added 2.27 percent to 180 rupees.
The day's turnover was 1.95 billion rupees ($15 million), more than this year's daily average of over 1.27 billion rupees.
Foreign investors were net buyers of 458 million rupees worth of shares on Monday, extending their year-to-date net purchases of 11.56 billion rupees.