Sri Lankan shares gained 0.5 percent on Friday led by hotel shares with local investors dominating the buying, while foreign investors continued with their exit strategy.

The All-Share Price Index .CSE of the Colombo Stock Exchange closed up 0.48 percent, or 18.32 points, at 3,824.17. It hit a record high of 3,847.18 points on Tuesday.

"Local investors do not have much investment options due to low interest rates," said Harsha Fernando, CEO at SC Securities. "They buy at higher prices, pushing up the market."

The central bank's key policy rates have been maintained at multi-year lows since November.

Foreigners, who have been net sellers in 33 out of the 41 trading sessions so far this year, exited amid the island nation's budget deficit woes.

Foreigners were net sellers of 80 million rupees worth of shares on Friday.

Foreigners, who had been net buyers since 2001, turned net sellers in 2009, selling 785.3 million rupees worth of shares. They have sold 5.6 billion rupees worth shares so far this year and 3 billion rupees since the Jan. 26 presidential polls.

However, analysts say the numbers are distorted due to the gradual exit of a U.S.-based hedge fund after its Sri Lankan-born founder was charged in an insider dealing case.

On Tuesday, Sri Lanka's finance ministry said the 2009 budget deficit had hit an eight-year high of 9.7 percent of GDP, well over the 7 percent target set by the International Monetary Fund for a $2.6 billion loan. The ministry also said the country will miss the 2010 IMF deficit target as well. [ID:nSGE6210HH]

The IMF last week said it would delay a third tranche of the loan until it sees the budget after the April 8 parliamentary polls. [ID:nSGE61O0GP]

Sri Lanka will initiate tax and investment reforms in its next budget following the election, a government official said on Thursday. [ID:nSGE6220HA] [ID:nSGE6230BZ]

Sri Lanka will hold legislative elections on April 8. For Sri Lanka's key political risks, see [ID:nRISKLK]

Analysts said offshore investors would watch out for factors like further erosion in fiscal management, rating downgrades, political instability or IMF suspending the loan.

The bourse is still up 13 percent so far this year, following a 125 percent rally in 2009, one of the best performers in Asia.

Shares in John Keells Hotels KHL.CM gained 3 percent to 26.25 rupees, while Asian Hotel Properties AHPL.CM rose 3.7 percent to 133.75 rupees a share, on a weighted average.

The day's turnover was 1.1 billion rupees ($9.3 million), around twice of the 2009 daily average of 593.6 million rupees. The Sri Lankan rupee LKR= closed weaker at 114.22/25 per dollar compared with Friday's close of 114.15/18 on importer demand for dollars, dealers said.

The interbank lending rate or call money rate CLIBOR edged down to 9.320 percent from Thursday's 9.336 percent.

For secondary market rates, please see . ($1=114.235 Sri Lankan rupees)

Source Reuters