The Kenyan shilling gained against the dollar on Tuesday aided largely by banks selling greenbacks as high interest rates squeezed shillings out of the market, while stocks edged lower in thin volumes.

At the market close, commercial banks quoted the shilling at 96.60/80 against the dollar, stronger than Monday's close of 96.90/97.10.

Interbank guys and corporate selling has helped the shilling gain a bit, said a trader with one commercial bank.

Traders said exporters selling dollars on expectations that the local currency could firm further on high interest rates and new central bank's rules to intensify the scrutiny of banks that borrow from its discount window were supporting the shilling.

Tight liquidity in the money markets since the central bank raised its key lending rate by a record 5.5 percentage points to 16.5 percent last week Tuesday has seen the shilling gain 3 percent in past eight sessions.

There is reduced dollar demand from clients because they expect it (shilling) to gain further, said Bhavin Chandaria, a trader at Imperial Bank.

The market is tight due to the high interest rates in the market. We could see higher, 95 levels by the end of this week.

The weighted average rate on the interbank market extended its rise to 27.021 percent on Monday from 25.9 percent on Friday, the central bank said on Tuesday.

Considering the current high interest rate on the shilling, coupled with the new rules introduced by the (central bank), the local unit is expected to firm against the dollar in the days to come, said Bank of Africa in a daily note to clients.

At the Nairobi Stocks Exchange (NSE), the benchmark NSE-20 Share Index inched 0.29 percent lower to 3,449.31 points, after the bourse opened 4-hours late due to a technical hitch with the central depository system.

Turnover was a bit down because the market opened late. But net-net, investors were selling shares after they rose significantly in the last two weeks, said Ronald Lugalia, an analyst at Afrika Investment Bank.

Shares of internet connection firm Access Kenya fell 6.87 percent to 5.55 shillings as investors sold to book gains it made last week on talk of mergers and acquisitions.

The NSE also launched two new stock indexes, The FTSE NSE Kenya 25 Index and the FTSE NSE Kenya 15 Index, and said it planned to start one for Treasury bonds next year.

The fixed-income market remained subdued with government bonds worth 100 million shillings traded, down from 129.4 million shillings on Monday.