(Reuters) - Sri Lankan shares rose more than 1 percent to a near four-week high on Thursday, extending gains from the previous session after the central bank in a surprise move cut key monetary policy rates by 50 basis points.
The main stock index advanced as much as 1.01 percent to 7,051.43, its highest since March 23, in early trade.
The central bank early on Wednesday surprised markets by cutting key policy rates to record lows in a move aimed at boosting economic growth amid near zero inflation.
"Now the direction on the interest rate is very clear and the gains could be sustained after the rate cut," said Hussain Gani, deputy CEO at Softlogic Stockbrokers (Pvt) Ltd.
"We see more participation of local investors including retailers. Foreigners are also trading in high volume. Investors were uncertain about the interest rates, but now it is evident that the new government wants to lower interest rates further."
Turnover stood at 744.1 million rupees ($5.60 million) at 0655 GMT.
Investors have been cautious due to political uncertainty as Prime Minister Ranil Wickremesinghe's party did not have a majority in parliament, stockbrokers said.
However, efforts by both ruling and opposition parties for a stable government have helped to improve investor confidence, they said, adding they were still largely on a wait-and-see mode ahead of parliamentary elections possibly in June.
Sri Lankan rupee forwards traded weaker on Thursday on importer dollar demand in dull trade, dealers said.
Actively traded two-week forwards were at 133.90/95 per dollar at 0712 GMT, compared with Wednesday's close of 133.78/85. One-week forwards were steady at 133.60 per dollar amid moral suasion by central bank.
Dealers said one-month forwards were down at 134.15/25 per dollar, compared with the previous close of 134.05/15.
They said the rupee might be under downward pressure after the central bank cut interest rates.
The central bank through moral suasion prevented the spot rupee from dropping below 132.90/133.20, a limit it set in February.
Central bank officials were not available for comment.
The main stock index advanced as much as 1.01 percent to 7,051.43, its highest since March 23, in early trade.
The central bank early on Wednesday surprised markets by cutting key policy rates to record lows in a move aimed at boosting economic growth amid near zero inflation.
"Now the direction on the interest rate is very clear and the gains could be sustained after the rate cut," said Hussain Gani, deputy CEO at Softlogic Stockbrokers (Pvt) Ltd.
"We see more participation of local investors including retailers. Foreigners are also trading in high volume. Investors were uncertain about the interest rates, but now it is evident that the new government wants to lower interest rates further."
Turnover stood at 744.1 million rupees ($5.60 million) at 0655 GMT.
Investors have been cautious due to political uncertainty as Prime Minister Ranil Wickremesinghe's party did not have a majority in parliament, stockbrokers said.
However, efforts by both ruling and opposition parties for a stable government have helped to improve investor confidence, they said, adding they were still largely on a wait-and-see mode ahead of parliamentary elections possibly in June.
Sri Lankan rupee forwards traded weaker on Thursday on importer dollar demand in dull trade, dealers said.
Actively traded two-week forwards were at 133.90/95 per dollar at 0712 GMT, compared with Wednesday's close of 133.78/85. One-week forwards were steady at 133.60 per dollar amid moral suasion by central bank.
Dealers said one-month forwards were down at 134.15/25 per dollar, compared with the previous close of 134.05/15.
They said the rupee might be under downward pressure after the central bank cut interest rates.
The central bank through moral suasion prevented the spot rupee from dropping below 132.90/133.20, a limit it set in February.
Central bank officials were not available for comment.
($1 = 132.9000 Sri Lankan rupees)
(Reporting by Shihar Aneez; Editing by Subhranshu Sahu)
