The rupee closed at a new 12-month peak on Monday, riding on a spurt in foreign inflows and a globally weaker dollar.
The unit closed at 47.9375/9400 per dollar, surpassing the previous 47.99/48.00.
It climbed as high as 47.9225 in intra-day trade before state-run banks intervened on behalf of the central bank.
"The general feeling is that the rupee could gain a little more as the dollar continues to weaken," said a trader with a state-run bank.
"Dollar supplies are also strong, and only the central bank support (for the dollar) is slowing a rise."
The rupee, which has appreciated by 2.38 per cent from a life low of 49.08 in mid-May, has benefited from robust trade and other inflows.
Remittances by expatriate Indians have risen because of higher local interest rates and jitters over a US-led strike on Iraq.
Forex reserves jumped $1.073 billion to a record $69.508 billion in the week to December 20, the highest weekly rise since the week ended March 22.
The dollar's decline is estimated to have left the rupee undervalued by nearly three per cent, leaving scope for more gains.
The firm rupee led to a decline in premiums on the forward dollar, which mainly derive their value from the demand and supply to hedge, although they are also sensitive to changes in US and Indian interest rates.
The premium on the six-month dollar closed at 3.58 per cent against Friday's 3.63 per cent.
