MUMBAI, May 14: India's central bank bought $2.3 billion in intervention in March, sharply lower than its record dollar purchases in February, the Reserve Bank of India's (RBI) monthly bulletin showed on Monday.

The rupee began a sharp rally around mid-March that took it to seven-year highs that month. It has since risen to a nine-year high of 40.53 per dollar last week, and on Monday it was trading around 41 per dollar, up about 8 percent this year.

The March intervention took the RBI's dollar purchases to $22 billion since the start of November 2006. It bought a record $11.9 billion in February alone to check the rupee's rise.

The rupee's gains have been powered by robust capital inflows, some of which the central bank had tried to absorb.

Foreign funds have bought nearly $3 billion of local equities this year, after pouring in nearly $8 billion in 2006.

However, when it sells the rupee to stem currency gains, it adds rupees to domestic money supply. That meant it was adding to money supply and stoking price pressures at the same time it was tightening policy to rein in credit growth and inflation.

Firm inflation data prompted the central bank to intervene less aggressively in March, analysts say.

The central bank is widely believed to have sold rupees less aggressively in April and May too, though traders remain wary of building large currency postions on fears of provoking intervention.

India's foreign exchange reserves were $204 billion on May 3, rising $26.8 billion in 2007, of which $9.4 billion had come since early March. Traders said a large part of this year's increase was due to the RBI's dollar purchases.

Before November last year, the RBI had not intervened since May 2006. In the fiscal year that ended on March 31, the central bought a total of $26.8 billion in intervention. — Reuters