COLOMBO Aug 7 (Reuters) - Sri Lankan stocks gained more than 1 percent on Thursday, hovering near a three-year closing high, led by large caps as indications of a cut in key policy rates by the central bank governor helped investors shift to riskier assets.
The main stock index gained 1.1 percent, or 74.92 points to 6,908.18, its highest close since September 14, 2011, boosting market capitalisation by 31.44 billion rupees ($241.53 million). It has risen 16.8 percent so far this year.
"Buying by foreign investors in John Keells Holdings pushed up foreign inflows and turnover," said Reshan Wediwardana, research analyst at First Capital Equities (pvt) Ltd.
Stockbrokers said investors had "no option" but to buy into stocks due to low interest rates as the market is expecting another rate cut during the Aug. 15 policy rate announcement.
Central bank chief Ajith Nivard Cabraal said on Thursday there was a greater chance of a cut, rather than a hike, in key policy rates, a day after yields on one-year government debt fell to 6.45 percent, below the rate of 6.50 percent at which the central bank mops up liquidity from commercial banks.
Hopes over strong earnings, declining interest rates and continued buying by foreign investors have helped boost interest in risky assets in the $22 billion-worth stock market.
Shares in Keells ended 0.84 percent firmer at 238 rupees, while large cap shares like Ceylon Tobacco Company and Carson Cumberbatch helped boost the main index with 2.54 percent and 2.17 percent gains, respectively.
Turnover was 2.24 billion rupees ($17.21 million), more than double this year's daily average of about 1.01 billion rupees.
Foreign investors bought a net 424.6 million rupees worth of shares on Wednesday, extending the year-to-date net foreign inflow to 11.68 billion rupees.
The index has been in the overbought region since July 3, as local investors moved funds from fixed income to riskier assets such as shares because of low interest rates and foreign buying.