RBI intervenes via state-run banks to curb rupee's rise, traders say

By Neha Dasgupta

NEW DELHI (Reuters) - The Reserve Bank of India (RBI) bought as much as $1 billion over Wednesday and Thursday to prevent the rupee from strengthening too much after the currency hit three-month highs as investors poured funds into emerging markets, two traders said.

As recently as last month the RBI had intervened frequently to defend the rupee after it hit its lowest since September 2013, but a rapid turnaround in fortunes has persuaded the central back to buy dollars to prevent excessive appreciation.

RBI Governor Raghuram Rajan has frequently criticised central banks that undertake policies that devalue currencies and said the central bank only intervenes to prevent excessive volatility.

Despite repeated bouts of dollar buying, the rupee struck a three month high of 66.1700 per dollar on Thursday and was on course to post a gain of 3.2 percent in March - its biggest monthly gain in 2 1/2 years.

Traders estimated the RBI had sold around $1 billion during the past two days trying to halt the rupee's ascent.

By 2.21 p.m. the rupee stood at 66.2150/2200 per dollar, having strengthened from 66.37/66.38 at the close of onshore trade on Wednesday.

The rupee's appreciation reflects a broad move into high yield emerging markets by investors, as central banks for major economies - notably the Bank of Japan and European Central Bank - have adopted a more dovish stance.

That trend was reinforced earlier this week as comments by U.S. Federal Reserve Chair Janet Yellen made investors realise that U.S. interest rates could rise more slowly than they had earlier thought.

Traders said they believe the RBI would be reluctant to see the rupee appreciate too much, and would prefer to keep the currency within a range. Several traders said they reckoned the central bank would favour stabilising the market between 65.50 to 66.00 rupees per dollar in the near-term.

"The RBI won't let the rupee appreciate that much, even though they say they are not devaluing," said the head of currency trading for a major Indian bank.

Traders said they expect the rupee could appreciate further, after foreign investments into Indian debt and equity surged to a one-year high of $3.3 billion in March, reversing outflows from earlier this year.

The RBI's latest dollar purchases will boost foreign exchange reserves, which stood at a record high of $355.95 billion on March 18, according to the latest data.

($1 = 66.2850 Indian rupees)

(Reporting by Neha Dasgupta; Editing by Simon Cameron-Moore)