This is the first time that the rupee crossed the 40-mark since mid-January when it touched an all-time low of 40.45. The rupee finally closed at 40.55 after the State Bank sold dollars on behalf the Reserve Bank. A series of statements from the finance ministry and the RBI led to the cooling of the rupee. After opening at 39.77/78 (against the Wednesday's closing level of 39.77/78), the rupee went through the roof and pierced the psychological barrier of 40 on heavy import covering led by the SBI and a clutch of foreign banks within hours of opening the market.

An Indian news agency quoted unnamed RBI officials as saying that the sanctions will have no effecton the rupee and there was no cause of panic as the debt servicing ratio was comfortable.

Finance minister Yashwant Sinha discounted all fears of a run on the rupee in Delhi, saying there was absolutely nothing to indicate a loss of confidence among investors about India following the economic sanctions. Reacting to suggestions that corporates drove down the rupee against the dollar over fears of US sanctions, Sinha said: "The rupee has appreciated at the end of the day, which means there is no loss of confidence."

Finance secretary Montek Singh Ahluwalia said the sharp fall in the rupee is no cause of worry and the rupee's movement is being monitored. These statements were followed up by action by the State Bank, the largest player in the forex market. It started to pump in dollars in the second half of the day after buying it in the market in early sessions. The SBI was buying dollars after the rupee crossed the 40-mark and was quoting at 40.75 when it made an about-turn and started to sell dollars at40.60. This cooled the market and the rupee started getting a direction and finally closed at 40.50/55. Dealers said that the SBI sold an estimated $50-100 million on behalf of the RBI.

"The RBI managed to contain a fair amount of the free fall through its statements," ICICI Bank's executive vice-president (treasury) PH Ravikumar said. In the morning, panic gripped the market as importers rushed to cover. "There was very little scope for speculation. The entire demand was trade demand and this is why SBI was buying. In fact, exporters sold as soon as the rupee crossed the 40 mark. But the demand was too much so the rupee sank," a chief dealer with a private bank said.

"Importers are of the view that the rupee will depreciate on account of the sanctions as foreign inflows to India will come down," a chief dealer in a foreign bank said.

In the forward segment, the six-month forward premium crossed the 10 per cent barrier and touched 12 per cent before settling at 9.50 per cent. The State Bank was seenreceiving in the forward segment. Importers rushed to cover on fears that tight sanctions will cripple the economy. The US and Japan have already imposed sanctions following the series of nuclear tests.

Sensex bounces back on FII buying, rumours

The stock markets bounced back on Thursday with Sensex recovering 115 points. FII buying sparked by the falling rupee aided a smart rebound in market sentiment. Rumours played their role, too. There was talk of the centre issuing an ordinance to permit buyback. Besides, marketmen expected a bonus from ITC. The Sensex which hovered in the band of 3,748.63 points and 3,898.69 points, the intra-day's low and high respectively, finally closed at 3,897.94 registering a gain of 115 points ( 3.04 per cent).