The rupee firmed 0.55 percent to 126.90/127.00 to the dollar, its highest since May 3, compared with Thursday's close of 127.60/70, Reuters data showed.

"The lowest trade was done at 125.50 early but later importers bought dollars and booked forwards," a dealer said.

Central Bank Governor Ajith Nivard Cabraal said on Thursday the rupee was likely to further appreciate due to continuous inflows in the absence of importer demand for dollars.

Colombo Stock Exchange's main index edged down 0.2 percent or 10.87 points to close at 5,526.49.

Analysts said selling pressure due to year-end settlements dragged the bourse down, but falling interest rates would help to attract investors towards risky assets in the new year.

Treasury bill yields eased between 21-27 basis points at a weekly auction on Wednesday in line with the central bank's rate cut last week.

Total turnover on Friday was 959.3 million rupees ($7.51 million), higher than this year's daily average of 891.9 million rupees. Foreign investors were net buyers of 310.5 million rupees worth of shares, extending net foreign buying this year to 37.78 billion rupees.