Meanwhile, fresh buying helped the benchmark 30-Share BSE Sensitive Index gain 70 points on Friday. The Sensex closed the day at 3,401.74 points, after touching a high of 3,409.50 points and a low of 3,344.09 points.

Forwards softened considerably, with the six-month annualised forward premium falling by 75 basis points over Thursday's levels to close at 8.72 per cent. The fall in forwards across all maturities continued unabated.

Dealers predict that the forward rupee will soften further, with sentiments dramatically improving in the forex market. The planned launch of the Resurgent India Bond, which is likely to mop up over $2 billion, has also contributed to the positive sentiment.In the bond market, there was active buying interest. The 11.55per cent gilt maturing in 2001 traded at Rs 100.20 -- 13 paise higher than the Reserve Bank's sell price of Rs 100.07.

Government securities were active on Friday, with buying interest seen in several near-term maturities.

"Easing of sanctions is being interpreted as easy-money market conditions, banks, hence, are buying securities," said a private-bank dealer.

The rupee opened at 42.55/57, marginally stronger than Thursday's close of 42.58/60. Dealers said local banks were at the forefront of the dollar selling.

The rupee, which opened at 42.50/54, stronger than its previous close of 42.57/60, strengthened further on good dollar-selling by banks and exporters to touch its intra-day high of 42.44. "There was a lot of selling in the early part of the day by banks and corporates," a dealer in a private-sector bank said.

After touching 42.44, the rupee fell as a foreign bank entered to buy dollars on behalf of its corporate client to touch its intra-day low of 42.54. The rupee subsequently closed at42.52/54 -- a gain of 5 paise over Thursday's close.

The forward premiums softened on Friday as the spot rupee strengthened to its intra-day high of 42.44. "Forwards opened 7-8 paise stronger than their previous close," dealers said. The six-month forward premium strengthened, as the spot rupee gained, to close at 8.72 per cent. July premiums closed at 9 paise, August at 37 paise and September at 69 paise. The one-month annualised premium closed at 6.25 per cent (7.25 per cent), three-month at 8 per cent (8.8 per cent) and six-month at 8.72 per cent (9.48 per cent).

The one-year annualised premium also fell below the psychological mark of 10 per cent to close at 9.7 per cent (10.16 per cent).