Buoyed by large capital inflows, the rupee strengthened against the dollar on Monday, breaching the 47-mark to close at 46.95/96 against the dollar, 0.4% stronger than Friday's close of 47.11/12, after touching an intra-day high of 46.89. Such an upward swing, which would make exports more expensive, prompted intervention by RBI in a bid to control further appreciation of the Indian currency.

Dealers noted that there was a large demand for the dollar from public sector banks, which were acting on behalf of RBI. Well see the rupee strengthening at least in the near-term, however, I do not think this would be sustained for long, given the high fiscal deficit. We think the rupee will strengthen at least until the Budget is presented.

Also, with large capital inflows and the dollar weakening against other currencies, there is ample scope for the rupee to strengthen, said NS Venkatesh, MD&CEO at IDBI Gilts.

Venkatesh projects the rupee to trade between 46.70/5-47.10/5 in the coming days and says the central bank will intervene if there is large appreciation.

A report released by Goldman Sachs on Monday noted that there are significant pressures on the rupee to appreciate. Overseas funds have bought a net $4.3 billion worth of Indian shares last month, the most since October 2007, according to data released by Sebi. The BSE Sensex gained 28% in May, the best month since 1992.

Foreign inflows are increasing on the expectation of faster recovery in the third and fourth quarter of 2009. All those notional losses provided by companies will be reversed due to the rupee becoming stronger. A revision in GDP numbers in the coming months with a stable government will add momentum to Indian equity markets, said a report by Commtrendz Research.