The Indian rupee surged towards a recent 9-year peak on Friday after China's central bank said it would widen the yuan's trading band against the dollar, and local traders bet the Reserve Bank of India would let the rupee rise.
The partially convertible rupee ended at 40.70/71 per dollar, rising sharply in late trade to end higher than Thursday's close of 40.8550/8650.
The rupee hit a nine-year peak of 40.53 on May 9. "The implication of the news from China, on the margins, is that the RBI is less likely to intervene," said Agam Gupta, chief dealer with Standard Chartered, referring to the Reserve Bank of India.
China's central bank said on Friday that it would increase the yuan's trading band against the dollar from 0.3 percent to 0.5 percent. The news of the yuan's increased flexibility spurred Indian traders to build positions in the rupee on expectations that an appreciation in the Chinese unit would prompt the RBI to intervene less aggressively against the local currency.
The RBI is thought to intervene to smooth excessive volatility and maintain exporters' competitiveness. The RBI bought $2.3 billion in intervention in March in a bid to stem the rupee's rise, but analysts believe it has acted less aggressively in April and May.
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