The three-year bond carries a rate of 11.2 percent in the first year.

The coupon rate is pegged at one percentage point above the country's annual inflation for the remaining two years, the Central Bank's Acting Superintendent of Public Debt, M. Hemachandra, said in a statement

The bonds were placed Wednesday with two state-owned banks, a central bank source said.

The official inflation rate stood at 12.1 percent in November after ballooning to 18 percent last January.

Economists say the inflation-linked bonds should spur the government to keep a lid on inflation.

The central bank has forecast year-end inflation of around 10.0 percent, up from an annual average of 7.6 percent in 2004.

Inflation in the tropical island torn by ethnic conflict and with coastlines devastated by last December's tsunami has been fuelled by rising food and fuel costs.

The inflation-linked bond came almost a week after Sri Lanka got its maiden sovereign rating, a first step in tapping the international bond market for funds.

Two international rating agencies -- Fitch Ratings and Standard and Poor's -- assigned speculative ratings to the country. Fitch gave the nation a BB- rating while Standard and Poor's awarded it an even lower B+ sovereign rating.

Sri Lanka hopes to borrow 122.9 billion rupees (1.22 billion dollars) from the domestic market and 66.4 billion rupees (660 million dollars) from foreign sources next year, the government said in its annual budget for 2006.

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