Indian rupee rises on suspected intervention

India's rupee firmed from a 28-month-low against the dollar on Friday amid reports the central bank intervened in the foreign exchange market to prop up the ailing currency, traders said.

The central bank was believed to have stepped in to the market after the Indian currency hit 49.9 rupees to the dollar, a level last seen in May 2009, as investors sought a safe haven in the US unit.

The central bank intervention was believed to "have helped the rupee recover" from its low, a dealer at a Mumbai-based trading house said, speaking on condition of anonymity.

A spokesman for the Reserve Bank of India (RBI) told AFP that the bank, as a policy, does not comment on rupee movements.

The Indian unit strengthened to 49.09 rupees after the reported intervention but then lost ground again and was trading late Friday at 49.47 rupees to the dollar.

The rupee's fall is fuelling India's inflationary woes, making imported goods such as foreign crude oil, on which the country relies, more costly.

India's annual inflation is running at near double-digits and is the highest among major global economies.

Analysts said there could be more intervention by the bank in an attempt to brake the rupee's fall against the dollar as traders rush to the US currency due to fears over the outlook for the global economy.

"Rising imported inflation and forex volatility warrants greater intervention by the RBI," said Jay Shankar, chief economist with Religare Capital Markets.

He added he expected the RBI to intervene "aggressively" if the rupee hit the 50.5 level in coming days.

Another currency dealer said that "the RBI may not allow the rupee to fall further" from current levels.

But Indranil Pan, chief economist at Kotak Bank, said he expected the rupee to slide to 50-52 to the dollar levels in the near-term, recovering to 46 to 49 levels in the medium-term.

The rupee's record low against the US unit was 52 rupees, hit in March 2009.

The currency has slid nearly 10 percent in the past month, nudging 50 rupees to the dollar.

Unlike fellow emerging market giant China, India allows its currency to float freely.

Earlier on Friday, RBI deputy governor Subir Gokarn said the bank would not look to protect a fixed exchange rate and would only intervene to smooth volatility.

Volatility in exchange rates is "part of the game," Gokarn told television channel CNBC TV-18.

Dealers say the central bank's intervention has been modest so far.

All emerging market currencies have fallen against the dollar and the forex markets could remain volatile for some more time due to the uncertain global environment, analysts say.

Weak local equity markets -- which have slid more than 20 percent so far in 2011 -- have put additional pressure on the rupee as overseas funds sell Indian stocks.