The rupee slightly recovered to close at 124.40/60 a dollar, down from Tuesday's close of 123.30/70. Dealers said that the highest trade was done at 124.80.

"The central bank made a wrong decision in keeping the rates steady," said a currency dealer on condition of anonymity.

"That means heavy pressure on the exchange rate now. But we hope the rupee will recover to around 121 levels towards the end of this month on declining importer dollar demand and expected exporter conversions."

The rupee has depreciated 8.4 percent since the central bank on Feb. 9 stopped defending a specific exchange rate. A Reuters monthly forex poll has forecast the rupee to fall as far as 128.50 by the end of August.

The central bank on Wednesday kept its policy rates steady, contrary to market expectations of an increase, and cut this year's economic growth target to 7.2 percent from 8 percent.

T-bill rates rose between 28 to 31 basis points at a weekly auction, despite the central bank holding policy rates firm.

The stock market meanwhile edged down as investors stayed away on negative sentiment due to slower economic growth forecasts and fears of high interest rates.

The island nation's main share index barely moved down to 5,418.07.

The day's turnover was 1.21 billion Sri Lanka rupees ($9.80 million), highest since March 1, but below last year's daily average of 2.3 billion. Volume was 45.4 million. Last year's daily average was a record 102.7 million.

Foreign investors bought shares worth 71 million rupees, extending the offshore net foreign inflow to 3.13 billion rupees so far this year, after a net outflow of 19.1 billion last year.

The Colombo bourse is one of the worst performers this year among Asian markets, with a 10.8 percent loss.

Copyright Reuters, 2012