The central bank stayed away from the market for the first time in three trading sessions after selling dollars through a state bank to stabilise the local currency after it hit a more than six-month low on Friday.
The rupee closed flat at 128.50/60 to the dollar on Tuesday.
'The rupee ended flat on exporter forward-selling amid importer demand for dollars,' a dealer said on condition of anonymity.
The rupee lost 1.6 percent last week. It fell to 129.00/129.10 per dollar in early trades on Friday, its lowest in six months, as foreign investors sold debt as part of broader selloff in emerging markets on fears that loose global monetary conditions were about to end.
Central Bank Governor Ajith Nivard Cabraal said after market hours on Friday that the fall in the rupee was no cause for concern as foreign investors have been changing their positions rather than pulling out of the island nation's bond market.
The rupee has weakened 0.8 percent so far this year, following a 10.7 percent depreciation in 2012 as the central bank opted for a flexible exchange rate regime in February 2012.
Sri Lanka's main stock index fell to five-week closing low on concern over possible pullout by foreign funds, following regional peers.
It ended 0.42 percent, or 26.11 points, weaker at 6,193, its lowest close since May 6, with daily turnover slumping to a more than two-month low.
The market witnessed net foreign inflows of 32.69 million rupees ($254,200) on Tuesday, extending foreign inflows so far this year to 16.16 billion rupees.
The day's turnover was at 291.7 million rupees, the lowest since April 12 and well below this year's daily average of 1.01 billion rupees.
($1 = 128.6000 Sri Lanka rupees)
(Reporting by Ranga Sirilal and Shihar Aneez; Editing by Prateek Chatterjee)
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