The rupee rose to its highest close in over two years on Friday, helped by a bullish euro, though central bank intervention and importer demand kept it off the day's peak.

The local currency closed at 46.87/88 per dollar, the highest level since May 10, 2001. It moved between 46.8050 and 46.9000 during the day.

"The rupee's strengthening may continue so long as the euro continues its rally, but the pace won't be that much as people are slowly covering, and the mopping up operations continue," said K Harihar, treasurer at Development Credit Bank.

The euro gained against the dollar in the global market despite a half percentage point interest rate cut by the European Central Bank, amid persisting concerns about the health of the US economy.

But importers were still cautious and increasingly covering foreign exchange exposures after a recent bout of volatility, which saw the rupee slide to a three-and-half week intra-day low of 47.25 on Monday from a two-year high of 46.75 eight days earlier.

Traders said importer demand also triggered a round of covering in the evening, by banks, which had gone short earlier in the day.

The rupee has gained 0.47 per cent over the week, taking its total gains in 2003 to 2.37 per cent.

The local currency has benefited from the dollar's global slump and increased investment inflows, with foreign funds stepping up investments in Indian debt, after the drop in forward dollar premiums.

Such debt investments shot up to $400.4 million in May from a combined $264.2 million in the first four months of 2003. Net investments in the first three days of June stood at $10.2 million.

Forward dollar premiums ended lower because of the rupee's rise, but they were off the day's troughs after the Reserve Bank of India said it had no plans to cut the repo rate currently.

While premiums are mainly determined by importers' and exporters', they are also influenced by interest rate differentials between India and the United States.

The six-month premium ended two basis points lower at 1.82 per cent, though it was off the intra-day low of 1.67 per cent. The premiums are, however, up 73 basis points over the week.