Sources in the foreign exchange market said the RBI is looking at a band of 41.90-42.10 against the dollar and is prepared to defend the Indian currency against speculative attacks.

On Friday, the rupee closed at 42.07/09 after firming up to 41.94 during the day. The Indian unit plunged to a historic low of 42.42/45 on June 10 after the State Bank of India withdrew from the market.

"If the RBI remains a mute spectator it could turn out to be a bottomless pit for the rupee. The speculators have to be reined in through direct intervention. The fall in the rupee is no reflection of the fundamentals of the Indian economy and the sanctions have nothing to do with the value of the rupee," sourcessaid.

Bimal Jalan, who has taken several unconventional steps to stem the rot ever since he took over as the RBI governor, last week hinted at a new strategy of using forex reserves to prevent speculators from pushing the rupee down.

"There has not been much of a net capital inflow. A sizable chunk of the current foreign currency reserves has been mopped up from the market. There is no harm in using a part of the reserves to cool down the market," sources said.

The move is in sharp contrast to the earlier RBI stand that it will intervene only to prevent undue speculation, but not to defend any particular value of the rupee. The rupee has lost over Rs 2.50 since India conducted a series of nuclear tests on May 11 and 13. On May 15, the rupee closed at 39.76.

"At the current level, the rupee is undervalued if one takes the imputed value of the rupee based on the real effective exchange rate (REER). If one considers the base year as 1996-97, the rupee based on the REER should be around 40.66. Thecurrent value of the rupee is 42.08. It is likely to strengthen," a senior treasurer said. Senior bankers feel the worst is over for the rupee and the Indian unit should not fall further. Finance minister Yashwant Sinha has also made it clear that the centre will see to it that the speculative attack on the rupee comes to an end.