The Indian rupee gave up strong gains by Wednesday evening but still managed to close at a fresh two-month high with underlying sentiment upbeat on a weak greenback.
Some traders said the central bank refrained from intervening, but it did make enquiries with banks, which reported large arbitrage-driven dollar inflows in recent days.
The rupee ended at 45.8550/8600 to the dollar, off a morning high of 45.6950 but firmer than the previous close of 45.9050/9150 - its highest finish since July 12 when it closed at 45.6850/6950.
"There was some short covering which drove the rupee down," said a dealer at a private bank. "After the central bank made the enquiries, trade turned a bit cautious as the regulator may not be too happy with a rapid rise (of the rupee)."
The local currency, which analysts say is overvalued by almost two percent on a trade-weighted basis, has gained almost one percent this week, spurred by the central bank's move on Saturday to raise banks' cash reserve ratio, which some analysts say is the beginning of a rate-tightening cycle.
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