COLOMBO, July 17 (Reuters) - Sri Lankan shares fell on Monday, after posting their highest close in more than 18 months in the previous session, as investors booked profits in blue chips.
However, foreign players bought stocks on expectations of strong corporate earnings, limiting the downside.
The Colombo stock index dropped 0.37 percent to 6,741.07, its fourth session of decline in five.
"There was some profit-taking. But the turnover level was good and foreign investors were still on the buying side," said Hussain Gani, deputy CEO, Softlogic Stockbrokers.
The market could see a rising trend if yields on fixed-income securities fall as expected by the central bank, said analysts.
The central bank expects a further fall in T-bill yields due to less pressure from government borrowing and a proposed new auction system, Deputy Governor Nandalal Weerasinghe said in an interview with Reuters last week.
Foreign investors were net buyers of shares worth 155 million rupees ($1.01 million) on Monday, extending the year-to-date net foreign inflow to 23.6 billion rupees worth of equities this year.
Turnover was 736.4 million rupees, less than this year's daily average of 911 million rupees.
New foreign investors have been buying Sri Lankan shares since the Pakistani bourse was upgraded as an emerging market from a frontier one, said analysts.
Brokers said domestic investors have been waiting for clarity on the proposed inland revenue legislation, which some companies expect would result in higher costs of production.
The IMF, which has long urged Sri Lanka to boost tax revenue through modernisation and simplification of its fiscal system, has urged the government to submit to parliament a new Inland Revenue Act.
Shares of private lender Hatton National Bank fell 1.9 percent, while Commercial bank of Ceylon Plc, the country's biggest listed lender, ended 0.4 percent lower. ($1 = 153.7000 Sri Lankan rupees) (Reporting by Shihar Aneez; Editing by Subhranshu Sahu)