If the Central Bank sells down a part of its Treasuries holdings outright, the action will withdraw some liquidity and help retain foreign reserves, while also supporting the rupee.
Dealers said there were some foreign inflows into government securities.
In gilt markets a 5-year bond maturing on 2018, was quoted at a yield of 11.75/78 percent after opening at 11.82/84 percent.
Corrected: But excess liquidity dropped to 49 billion rupees Wednesday indicative of selling down of Treasury bills. The benchmark Colombo All Share Price Index (ASPI) closed 10.85 points lower at 5,783.62, down 0.19 percent after gaining 0.20 percent the previous day and the S&P SL20 closed 8.82 points lower at 3,205.48, down 0.27 percent, provisional data showed.
Turnover amounted to 582.78 million rupees, down from 816.9 million the previous day, with shares of 104 firms making losses against 79 firms that closed in positive territory.
Among the most heavily traded stocks, JKH contributed 266.56 million rupees to the day's turnover followed by speculative trading on troubled firms Touchwood with 96.08 million rupees followed by CIFL with 25.92 million rupees.
Touchwood saw more than 27 million shares change hands closing 20 cents higher at 3.30 rupees and CIFL saw more than 18.75 million shares change hands, to close flat at 1.20 rupees.
Foreign purchases amounted to 285.44 million rupees down from 445.52 million rupees the previous day and foreign selling amounted 173.57 million rupees, down from 203.89 million rupees a day earlier.
The market was weighed down by George Steuart Finance (GSF), Bukit Darah, CTC, Asia Hotels and Properties and Lion Brewery.
George Steuart Finance lost 122.00 rupees to close at 488.00 rupees. Bukit Darah closed 7.50 rupees lower at 652.50 rupees and CTC closed 6.30 rupees lower at 1,041.00 rupees.
Asian Hotels and Properties closed 2.40 rupees lower at 72.00 rupees and Lion Brewery closed 12.00 rupees lower at 365.00 rupees.
JKH gained 2.00 rupees to close at 222.90 rupees and Dialog gained 20 cents to close at 8.40 rupees while Sri Lanka Telecom closed 80 cents higher at 40.00 rupees.
Distilleries gained 3.20 rupees to close at 185.00 rupees and Asiri Hospitals gained 40 cents to close at 15.00 rupees.
Asia Capital was the top closing 2.30 rupees higher at 21.50 rupees, up 11.97 percent. SMB Leasing was the biggest loser, closing 10 cents lower at 30 cents, down 25 percent.
The rupee had gained to 131.95/98 against the US dollar on late trading in the spot market after opening the day at 132.15/18.
There was moral suasion from authorities to prevent the currency weakening below 132.00 but there was also some dollar selling later, dealers said.
Analysts say Sri Lanka's rupee has come under downward pressure for years due the central bank's practice of buying large dollar inflows, even during times of severe balance of payments troubles.
The central bank generated 88 billion rupees from the purchase of dollars originally raised by the National Savings Bank, which analysts say will create import demand in the future requiring dollar sales to prevent a weakening of the currency.
But excess liquidity dropped to 49 billion rupees Wednesday indicative of selling down of Treasury bills.