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The bond and foreign exchange markets remained closed on Monday as the stock market sank and banks did their year-end book balancing.

However, all eyes are on the Reserve Bank of India on Tuesday, as many feel the hikes in the cash reserve ratio and the repo rate last week were a precursor to major intervention by the central bank in the forex market.

Gaurav Kapur, senior economist with ABN Amro Bank, feels last Friday's hikes are definitely a preparation by the RBI to intervene to rein in the rupee. If the RBI intends to buy dollars, it will release rupee into the market. Therefore, it needed to tighten the rupee supply a little before it started its intervention and, hence, the increase in the cash reserve ratio and the repo rate.

However, Ajay Mahajan, president (financial markets), Yes Bank, feels the situation is confusing. "Specially, when the market is waiting for RBI intervention it usually does not. But I feel instead of a major intervention, the RBI is likely to just soak in rupees from the market."

Mahajan feels without any intervention the rupee may easily climb to 42.50 a dollar — notwithstanding the pressure of rising oil prices and the fact that export growth is lagging behind import growth.

Today's fall in the stock market may not do enough to stop this. A fall usually signifies exit by foreign institutional investors, who buy dollars as they exit the market, increasing the supply of rupees and pushing it down. However, Mahajan points out that foreign institutional investors do not have such an influence on the rupee any more and there are continuous inflows through foreign borrowings by Indian companies as well as foreign direct investment flows.

Kapur feels the RBI is keen to keep the rupee at round 43.70-43.80 a dollar and Mahajan feels with strong intervention it can come down to 44.10. That would be good news for exporters as a strong rupee has been playing havoc with their dollar earnings.