MUMBAI (Reuters) - Suspected RBI intervention hauled the rupee off a record low struck on Tuesday afternoon, reassuring a market worried by the central bank's earlier inaction as the currency's fall gathered pace.
Striking 58.98 per dollar at its weakest, the rupee had plunged 3.25 percent so far this week, notching record lows for two consecutive days.
Dollar-selling by state banks, believed to be acting at the behest of the RBI, prevented a fall though the 59 per dollar level, though intermittent bouts of dollar selling by exporters had also slowed the fall.
The partially convertible rupee recovered to 58.52/53 per dollar, but it was still weaker than Monday's close of 58.15/16.
"Finally the central bank stepped in. The selling was not huge but enough to cause a rebound in the rupee," said a senior dealer with a state-run bank, who declined to be identified given the sensitivity of the matter.
Comments from senior government officials have offered little comfort to investors. Economic Affairs Secretary Arvind Mayaram said the government will not take steps to stem the rupee's slide and it expects the currency to stabilize within days.
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Analysts believe pressure on the currency had intensified after comments on the limitations of currency intervention by Reserve Bank of India Governor Duvvuri Subbarao on Friday.
Subbarao said a failed defence of rupee can be worse than no defence, and reiterated that the central bank intervenes in the market only to manage volatility.
"Fundamentally, INR will continue to depreciate because of CAD (current account deficit), but this move has happened too soon and too fast," said Samir Lodha, managing director at QuantArt Market Solutions.
Analysts noted that while foreign institutional investors (FIIS) were still net buyers of debt and equity so far in 2013, the risk that they could turn sellers could force the central bank to intervene to at least moderate the volatility.
"The market is in a panic mode. Currently FIIs are still net buyers but if they turn sellers in coming days, in that case only hope will be RBI intervention for stability and with decent reserves, RBI can definitely stabilise volatility," Lodha said.
The weakness in the rupee has prompted investors to exit their positions in the debt market while the domestic equity market is also under selling pressure.
The rupee has dropped in 16 of the last 18 trading sessions and is down 8.3 percent since the start of May. The currency is among the top three worst performing currencies in Asia in 2013.
Traders said a drop in other Asian currencies also hurt sentiment for the rupee.
"Any respite for the INR from some possible bunched up FII debt and FDI inflows this month will be temporary," said Rajeev Malik, senior economist at CLSA in Singapore.
"Barring volatility, the INR will eventually weaken to cross 60/USD in a sustained manner. Admittedly, this is playing out sooner than we expected because of the earlier change in the global backdrop," he added.
(Reporting by Swati Bhat; Editing by Tony Munroe/Simon Cameron-Moore)