RBI starts buying dollars, halts rupee rally

The rupee rallied to an eight-month high, boosted by continued foreign fund inflows into domestic shares, but suspected dollar purchases by the prevented the currency from gaining much further.

The intervention on Wednesday was aggressive, with two traders telling Reuters that the Reserve Bank of India (RBI) likely bought nearly $1 billion and swapped it in forwards markets.

The RBI has long been expected to start buying dollars when the rupee strengthens to add to foreign exchange reserves of $297.29 billion - the highest since late December 2011.

The central bank's dollar purchases would reflect the strength of a rupee rally.

The RBI had to regularly buy the domestic currency just about half a year ago to keep it from hitting record lows.

"The sentiment is in favour of the rupee," said Paresh Nayar, head of fixed income and foreign exchange trading at First Rand Bank.

"Now 60 is a very crucial psychological level, which if breached, may trigger stop losses and there will be fresh views in favour of the rupee," Nayar said.

The partially convertible rupee closed at 60.14/15 per dollar, after hitting 60.04 - its strongest since July 30 and 0.6%above its Tuesday close of 60.48/49.

Heavy foreign buying has sent domestic shares to record highs, with net purchases reaching a $3.1 billion so far this year. Net inflows into the debt market stand at $5.85 billion.

The onshore forward premiums also rose on the back of the sell/buy swaps put forth by the central bank, dealers said. The one-year forward premium rising to as high as 507.50 points versus its close of 489.50 points on Monday.

In the offshore non-deliverable forwards, the one-month contract was at 60.60 while the three-month was at 61.28.