The Kenyan shilling was stable against the dollar on Monday and was seen firming due to a squeeze on shilling liquidity in the money markets, while stocks edged lower for a second session.

The Central Bank of Kenya raised the rate for its discount window to 11.34 percent from 6.25 percent after tightening the rules on Friday for overnight borrowing by commercial banks.

The change, which follows a decision by the central bank to stop injecting liquidity into the market via reverse repurchase agreements, makes it expensive to fund long dollar positions, driving up the overnight rate on the interbank market.

The bank has been using a range of short-term liquidity management tools to contain a steep fall in the currency.

At the 1300 GMT close of markets, commercial banks quoted the shilling at 92.60/80 against the dollar, barely changed from Friday's close of 92.55/75.

"People have developed a wait-and-see attitude until some news comes in, and then that will become a basis for reaction," said Duncan Kinuthia, head of trading at Commercial Bank of Africa.

Traders said they expected the shilling to strengthen towards 91.00, aided by rising yields in Treasury securities.

"We could see the local unit make further gains in the days to come as the cost of carrying long dollar positions becomes exorbitant," Bank of Africa said in a regular market report.

"We may also see importers shying away from doing forward contracts which also have become prohibitive."

At the Nairobi Stock Exchange, the benchmark NSE-20 Share Index edged down for a second session by 0.27 percent to 3,501.64 points.

Analysts said the bourse could remain subdued due to concerns about inflation and lingering worries over the exchange rate, which have pushed the index down 20.8 percent this year to a 19-month low.

Year-on-year inflation rose to 15.53 percent in July and is expected to keep rising in the next few months due to higher pump prices for petrol and other fuels.

"Our analyses of key momentum indicators continue to illustrate a sustained 'depression' in the coming week and the market will likely tread on the midline," said Apex Africa Capital in a weekly report.

Shares in cigarette-maker British American Tobacco, fell 6.0 percent to 235.00 shillings a share after they started trading without a dividend.

In the debt market, corporate and government bonds worth 3.04 billion shillings were traded, up from 2.07 billion shillings on Friday.