The rupee posted its first gain against the dollar in four sessions on Thursday, recovering from a new record low earlier in the session, after the Reserve Bank of India (RBI) governor did not rule out selling dollars directly to oil importers.
Making dollars available for oil companies would remove a sizeable source of demand for the greenback from the market, and help support the rupee, which has hit record lows over the last seven consecutive sessions.
The rupee also gained as traders saw sporadic intervention from the RBI, while other traders cited dollar selling by custodian banks as well as exporters converting their foreign currency holdings on the last day of the two-week deadline mandated recently by the central bank.
No wide impact was seen from the government's decision on Wednesday to allow a hike in petrol prices, especially as doubts emerged about whether policy makers would follow up with hikes in other fuels such as diesel that would have a bigger impact on fiscal consolidation.
"The statement from RBI was a positive for the market but I believe there were also genuine flows in the market after a long time. Foreign banks were major sellers today," said Paresh Nayar, head of fixed income and forex at First Rand Bank.
The rupee closed at 55.65/66 per dollar after hitting a record low of 56.40 hit earlier in the session. The pair had closed Wednesday at 55.9950/56.0050 on Wednesday.
The rupee has shed 12.7% against the dollar since its 2012 peak in early February and is the worst performer in Asia so far this year.
After intervening aggressively earlier this month, traders say the RBI has appeared to hold back in recent days, reluctant to fight the intense global risk aversion that is pushing up the dollar.
However, the central bank was seen selling dollars on Wednesday, and some saw signs of action on Thursday.
"There was a lot of selling from state-run banks as well today, which could probably have been on behalf of the RBI but custodian flows were also very good," a senior trader at a Japanese Bank said.
Thursday was the last day in which exporters had to convert their foreign currencies in their accounts.
The one-month offshore non-deliverable forward rates were quoted at 56.05 while the three-month NDF was at 56.82.
In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all ended around 55.72 on a total volume of $6.7 billion.
