The Reserve Bank of India (RBI) likely intervened after the rupee hit a record low of 68.86 per dollar on Thursday, pressured by broad strength in the U.S. dollar, capital outflows from emerging markets, and worries about India's demonetisation drive.
The low surpassed the rupee's previous all-time nadir of 68.85 hit in August 2013, when the country was mired in its worst currency crisis in more than two decades.
The intervention from the RBI sparked a slight rebound in the rupee to 68.83, two traders said.
The rupee has fallen around 3 percent so far this month, its biggest fall against the dollar since August 2015, though it has fared better than many other emerging market currencies have done since Donald Trump's shock win in the U.S. presidential election.
Traders spotted the RBI intervening when the rupee fell to around 68.83 per dollar and more heavily later in the morning, sending the rupee sharply higher to 68.74. The central bank likely sold around $500 million so far in the morning, the traders said.
Back then, pressure on the current account plunged India into its worst currency crisis in more than two decades, but this time India is seen as being far better positioned to resist outflows from investors attracted by higher U.S. interest rates.
Expecations that President-elect Trump will pursue an expansionary fiscal policy that will drive inflation higher and lead to higher U.S. interest rates, are behind rising U.S. yields that have attracted investors to the dollar.
Although foreign investors are pulling money away from Indian bonds, analysts say India's strong economic growth should sustain investor interest in equities, while foreign exchange reserves are at a near record high while inflation remains low.
There are worries, however, that Prime Minister Narendra Modi's shock move this month to ditch higher-denominated banknotes could dent the growth rate.
India is also still seeing outflows tied to the redemptions of dollar deposits, or foreign currency non-resident accounts (FCNR), that were raised from Indians living abroad to help pull the rupee out its crisis three years ago.
"The rupee is weakening due to a combination of three factors - dollar strength globally, FCNR outflows and the impact of demonetisation on GDP," said a trader at a domestic bank.
There are fears that Prime Minister Narendra Modi's shock move to remove 500 and 1,000 rupees notes from circulation will dent consumer demand and economic growth in the near-term.
(Reporting by Suvashree Dey Choudhury and Savio Shetty; Editing by Simon Cameron-Moore)