The Indian rupee rebounded on Tuesday after Reserve Bank of India's (RBI) intervention and profit booking by foreign banks, and gained 20 paise.
The rupee touched a historic low of 53.975 to the dollar Monday as the American currency strengthened from euro zone's political and economic crisis in global markets.
Early morning trade saw the rupee drop to 54.07 against a dollar, and central bank intervention strengthened it to 53.83 in the morning session.
In the afternoon session, the rupee was trading at 53.75 and later dropped to 53.88/89 to the dollar.
RBI has strongly intervened in the forex market to defend the rupee as it has been steadily losing against the greenback due to multiple reasons, ranging from the country's trade deficit, heavy demand for dollar, euro zone crisis and the government's policy confusions that discouraged foreign investments.
RBI reportedly has sold $400-$500 million in spot and forward markets.
RBI has taken several measures of late, from selling dollars to asking exporters to convert 50 percent of their foreign earnings in the Exchange Earner's Foreign Currency (EEFC) account into rupees.
However, analysts believe that RBI's intervention will have limited impact in the long run as it is not backed by government policies. Further the current low in rupee is also due to a strong dollar in global markets because of the euro zone economic crisis and weak markets.
The central bank will likely continue intervening and regulatory measures will keep coming in. Tinkering with the domestic dollar supply is not the same as encouraging capital inflows, which will need a change in the global backdrop, Piranha Kishore, a foreign-exchange strategist at Standard Chartered in Mumbai told Bloomberg.
Tuesday also saw heavy selling of dollars by nationalized banks as they liquidated their dollar holdings helping the rupee gain against the dollar. Meanwhile, foreign banks also started selling dollars to book profit as they expected RBI to defend the rupee's 54.00 level against the dollar.
RBI intervened in the market at 54.7 level but stayed out after that. It is strengthening now as foreign banks are selling dollars to book profit, a Bloomberg report quoted a senior currency dealer at a foreign bank as saying.