Markets will be closed for a public holiday on Friday on account of the New Year.

The rupee closed at 155.70/80 per dollar, compared with Wednesday's close of 155.65/75.

"Dollar demand from small banks dragged the currency", said a currency dealer.

The central bank governor last week said if inflation rate can be maintained between 4-5 percent, the depreciation in the rupee would be around 2-3 percent.

Sri Lanka is marketing two tranche of sovereign bonds with five-year tranche has indicated at initial price guidance of 6 percent area, and a 10-year tranche at 7 percent area.

The island nation had planned to raise $2 billion from dollar bonds this year.

Inflows from sovereign bonds will boost the rupee, currency dealers said.

The central bank has so far during the year purchased over $400 million from the domestic foreign exchange market to build up international reserves.

Dealers expect pressure on the currency to ease with more inward remittances ahead of the traditional New Year on April 14.

The currency has recovered and risen 0.32 percent since it hit a record low of 156.20 per dollar on March 16. The rupee has weakened 1.48 percent so far this year after declining 2.5 percent last year and 3.9 percent in 2016.

A gradual depreciation in the rupee and higher volatility are expected this year on account of debt repayments by the government, according to dealers.

The International Monetary Fund in March said that Sri Lanka's economy remained vulnerable to adverse shocks due to its large public debt and low external buffers.

The government must repay an estimated 1.97 trillion rupees ($12.68 billion) in 2018 - a record - including $2.9 billion of foreign loans and a total of $5.36 billion in interest.

Foreign investors sold government securities worth a net 6.3 billion rupees ($40.49 million) so far this year through April 4, central bank data showed.