The rupee grew stronger during the late trades to end close to an eight-year high against the dollar as dealers sold the greenback on expectations of a further weakening of the Indian currency.
The rupee closed at 42.92 against the dollar, inching closer to a recent high of 42.84, the strongest since June 1, 1999, according to Reuters data.
Analysts feel the dollar slide is the outcome of a purposeful stance taken by the Reserve Bank of India to strengthen the rupee and thus make imports cheaper. Making imports cheaper could contribute to taming inflation.
"The RBI wants the rupee to strengthen to make imports cheaper. Making imports cheaper would do help control inflation," said D K Joshi, principal economist with Crisil.
The rupee has gained about 9.5 per cent since hitting a three-year low last July, powered by capital inflows into Asia's fourth-largest economy.
However, the RBI may not go easy on this trend for long as it could hurt the profitability of infotech and infotech-enabled services companies, which are major drivers of Indian exports. About 70 per cent of the revenue of Indian infotech companies is dollar denominated.
"The RBI is well aware of what it is doing. Infotech and allied services could be hit by a fall in the value of the dollar. Hence, once inflation starts showing signs of cooling off, one could see the dollar growing stronger," Joshi said.