The government said on Wednesday it approved the proposal with an aim to increase dollar liquidity.

Local t-bill yields slipped 9 basis points at a weekly auction soon after the government announcement.

Rupee forwards were active, with two-week forwards closing at 153.15/30 per dollar, nearly unchanged from Wednesday's close of 153.10/30.

"There were a lot of activities in the bond market and the yields came down by 25 basis points after the announcement on the SLDB," a currency dealer said, asking not to be named.

The broader market was also waiting for approval from the International Monetary Fund on disbursement of the third tranche of a $1.5 billion loan and through a proposed sovereign bond issue in May, dealers said.

Sri Lanka has seen a rise in foreign inflows into equities and government securities since early this month, with foreign investors buying shares worth a net 13.1 billion rupees in 25 consecutive sessions through Thursday.

Foreign investors have also net bought government securities worth 4.17 billion rupees in the week ended April 19, although they have net sold 58 billion rupees worth of government bonds so far this year.