The Indian rupee briefly spiked to a nine-year high on Monday before it was knocked back by the central bank buying US dollars, traders said.
At 1:40 pm (0810 GMT), the partially convertible rupee <INR=IN> was at 40.33/34 per dollar, after having earlier risen as far as 40.23 its strongest since May 1998.
"The central bank came in quite aggressively between the 40.25-40.30 levels," said a local trader.
"Though they haven't bought much, their presence forced the market to cover its short-dollar positions," he said.
The Reserve Bank of India would not comment on whether it had intervened to weaken the rupee on Monday
"We do not comment on the intraday movement of the rupee," a central bank spokesman said.
The central bank bought $23.4 billion in intervention between January and May, data shows. Traders say it has also bought dollars in June and July to limit the rupee's rise.
Rising capital inflows are putting upward pressure on the rupee, which is squeezing exporters. At its peak, the rupee had risen by 10 percent against the dollar this year.
Foreign direct investment rose to $17.7 billion in 2006/07 from $7.7 billion a year earlier.
Foreigners have bought more than $9.5 billion of stocks so far in calendar 2007, higher than $8 billion in all of 2006.