The main index gained 1.1 percent, or 53.03 points, to 4,885.18, its highest since May 28.

“There was bargain hunting and we saw buying creeping in with the start of the fresh month,” said a stockbroker, speaking on condition of anonymity.

Yields in Sri Lanka’s 364- day and 91-day T-bills have risen 330 basis points and 233 basis points since the central bank raised policy rates for the first time since 2007 on Feb. 3.

Last week, the Securities and Exchange Commission (SEC) issued a rule barring brokers from selling shares for six months from the day of buying, and that triggered selling.

But foreign investors were net buyers of 94.4 million rupees ($715,200) worth of shares on Friday, which analysts attributed to a weaker rupee, extending total net inflows into the stock market to 22.6 billion this year.

Turnover was 313.1 million rupees.

The rupee strengthened to 131.00/20 against the dollar from Thursday’s close of 132.80/132.20 on dollar sales by two private commercial banks after a state lender sold less than a million dollars at 132, dealers said.

Sri Lanka’s central bank on Thursday said it still believed the rupee would stabilise at levels stronger than 125 to the US dollar.

The rupee’s foreign exchange rate weakened to 128.25/128.30 per US dollar from Friday’s close of 128.10/128.30, in light trade with low dollar sales by exporters ahead of the April festival season. The currency has risen 2.6 percent since it hit a record low of 131.60 on March 19.

But it has fallen 10.9 percent since the central bank stopped defending it on Feb. 9.

The IMF on Friday said it will consider making a $400 million disbursement on Monday and the final $400 million tranche of a $2.6 billion loan a few months later.

Economic Development Minister Basil Rajapaksa on Monday said the rupee will stabilise once the IMF money comes in to the island nation’s $59 billion economy.

“Some people are holding dollar conversions and I think they will bring them when they see the stability. The stability level will be a price suitable for importers, exporters and government,” Rajapaksa told reporters, without elaborating.

Analysts expect depreciation pressure to remain in the medium to longer term until the country sees stronger export revenues.

The central bank on Friday said that more than $500 million in investment is expected over the next few weeks, after the country received $164.2 million of inflows into the stock market and $400 million into government securities in the first quarter.

A hike in motor vehicle import taxes by the government pulled the stock market 0.4 percent or 21.50 points down to 5,398.70 to a one-week low with the motor sector index falling 8.11 percent.

The new tax policy also pulled down shares of India’s Bajaj Auto, which account for 10 percent of overall sales in Sri Lanka, by 1.4 percent.

The day’s turnover was 694.6 million Sri Lanka rupees ($5.42 million), well below this year’s daily average of 1.35 billion. Foreign investors were net buyers of 34.4 million.

The Sri Lankan rupee closed at 125.55/70 per US dollar, down from Thursday’s close of 125.10/30.

Central Bank Governor Ajith Nivard Cabraal on Friday told Reuters the rupee will recover substantially due to inflows at least $365 million into stocks, government securities, banks, and a hotel project.

But currency dealers said they were sceptical the inflows would ease depreciation pressure on the rupee, as the inflows would not be coming to the market.

Instead, dealers said the central bank has been absorbing them via swaps.

“If those inflows are swaps, definitely they are not going to help the market.” said a currency dealer on condition of anonymity.

Cabraal said a “fair amount” of the inflows will be absorbed by the central bank to boost reserves. Analysts expect the rupee to recover in April on declining dollar demand and expected exporter conversions.

The Sri Lankan rupee’s foreign exchange rate has depreciated 9 percent since the central bank on February 9 stopped defending a specific exchange rate. A monthly forex poll has forecast the rupee to fall as far as 128.50 against the US dollar by the end of August.

The rupee closed at 121.80/122.00 to the dollar, against Tuesday’s close of 121.40/60, on importer dollar demand in light trade, dealers said.

It has fallen 6.6 percent since Feb. 9 after the central bank decided to drop price-specific intervention to maintain a targeted exchange rate, which cost it more than $2.7 billion in foreign exchange reserves since August.

Standard & Poor’s Ratings Services on Wednesday revised Sri Lanka’s long-term foreign currency sovereign rating outlook to stable from positive due to external imbalances while Fitch warned of a rating downgrade for the same reason.

The rupee hit a record low of 123.40 on Tuesday, but the central bank sold $40 million in dollars through a state bank to bring the currency back up, in a break with its new forex policy.

A Reuters monthly forex poll on Wednesday forecast the rupee to fall as far as 128.50 by the end of August.

Government data on Wednesday showed that inflation in February surprisingly slowed to a 28-month low, despite an increase in fuel prices and costlier imports caused by the rupee’s fall.

Sri Lanka’s main share index gained 0.49 percent or 26.42 points to hit 5,458.09 as retail investors bought discounted shares and a block deal in Sathosa Motors PLC boosted turnover.

Sathosa Motors, which ended 3.32 percent firmer at 227.30 rupees, accounted for half the day’s turnover of 1.68 billion Sri Lanka rupees ($13.77 million).

The company in statement to the bourse said privately-held Access Engineering Ltd, which opens its initial public offering on Tuesday, purchased 59.6 percent of Sathosa at 235 rupees a share from Itochu Corporation.

Foreign investors were net sellers for the first time in 14 sessions on Wednesday, with a net outflow of 805.7 million rupees. So far this year, the net foreign inflow is 2.35 billion rupees, after a net outflow of 19.1 billion last year.

The Colombo bourse is one of the worst performers this year among Asian markets, with a 10.2 percent loss while the majority have had positive returns.

The country’s banks began selling dollars, in what appeared a roundabout way to stabilise the Sri Lankan currency.

The slide was LKR 1 against the dollar on Wednesday, while it was LKR 4 on Tuesday, one dealer said, and added that he was expecting the LKR to lose even more ground.

According to the Central Bank’s release, as at 9.30 am on Wednesday, the buying rate was 119.16 while the selling rate of the dollar was 122.35.

As the day wore on, the LKR was seen losing more ground, though the Bank insisted that this was because of speculation.

Before the Bank stopped propping up the LKR, the exchange rate was in the region of 113 to the dollar.

“The recent depreciation of the Sri Lanka rupee, which seems to be a reaction of forex dealers adjusting to the more vibrant market-driven policy framework, would appear to be a temporary overshooting of the realistic level,” the Bank said in a statement released mid-day.

The Central Bank said that it had been intervening in the domestic forex market in recent years to build up foreign reserves and to smooth out any undue fluctuations in the exchange rate.

Such interventions resulted in the build up of foreign reserves to a historically high level of $8.2 billion by August 2011, preventing an excessive appreciation of the rupee.

However, during the second half of 2011, the widened trade deficit underpinned mainly by the sharp increase in import expenditure necessitated the Central Bank to supply foreign exchange to meet a part of such increased demand, despite increased receipts on account of remittances, tourism and inflows to the capital and Financial Account.

The central bank has spent more than $850 million propping up the rupee since President Mahinda Rajapaksa ordered a surprise 3 percent devaluation on Nov. 21.

Since then, dealers say the central bank on average has been selling $25 million a day to hold the rupee at 113.89/90 a dollar.

The IMF last year warned that central bank intervention was threatening the non-borrowed foreign exchange reserve position, and withheld the eighth tranche of a $2.6 billion loan as a result.

Central Bank Governor Ajith Nivard Cabraal told Reuters in an interview that he saw depreciation pressure waning within a “maximum month or two months.”

“We see a large inflow coming in,” Cabraal said. “Ours is a measured intervention, which is going to be on both sides. In three months, (people) will be asking me ‘Why are you buying dollars?’”

The central bank is negotiating a $1 billion long-term loan to finance petroleum imports, and is expecting another $500 million soon from long-term currency swaps, Cabraal said without elaborating.

Sri Lanka is targeting $25 billion in inflows in 2012, a 31 percent increase from the $19 billion in 2011.

Although the $59 billion economy was forecast to have grown by 8 percent last year, Sri Lanka is expected to have recorded a balance-of-payments deficit in 2011.

Foreign exchange reserves fell around 27 percent in the last five months of 2011 to $6 billion, the cost of supporting the rupee while many other Asian peers let their currencies fall.

An IMF team is due in Sri Lanka on Jan. 25 to review Sri Lanka’s performance under the loan program, and sources close to the global lender have said it will not release any more money until the central bank allows more rupee flexibility.

Sri Lanka needs to ensure that inflation remains “under control,” Cabraal said in a recent interview. The impact on the nation’s exports and growth from Europe’s debt crisis and a struggling US recovery “has been low,” he said.

The Central Bank of Sri Lanka on Oct. 10 left interest rates unchanged for a ninth straight month, joining Asian nations from Malaysia to the Philippines in holding borrowing costs as the faltering global economy threatens the region’s exports.

The island’s growth has rebounded after the end of a 26 year civil war in May 2009 boosted infrastructure development, foreign investment and tourism.

“We have built up the space to make the necessary adjustments if necessary,” Cabraal said in the Oct. 26 interview while attending a Commonwealth Business Forum in Perth, Western Australia. “I hope we don’t need to use it.”

The bank has kept its reverse repurchase rate at 8.5 percent and the repurchase rate at 7 percent since January. The next monetary policy announcement is scheduled for Nov. 8.

Consumer prices in the capital, Colombo, increased 6.4 percent in September from a year earlier after gaining 7 percent in August. The island nation’s $50 billion economy is forecast by the central bank to expand 8.3 percent this year, up from 8 percent in 2010. Exports account for about a fifth of gross domestic product.

Cabraal said overseas shipments to Europe, Sri Lanka’s biggest market, have been buoyant as consumers continue to purchase garments produced in the South Asian island.

The Sri Lankan rupee, which has risen 0.7 percent against the dollar this year, will also hold its value amid anticipated foreign inflows, he said.

“The global crisis is something that is worrying, but I am confident that this would change,” Cabraal said. “What is needed is support in times of difficulty. If the key countries act, stability should return fast.”