The rupee rebounded in late trade to end the day down 2 percent at 137.25/75. Currency dealers said there were large dollar sales from exporters at the session lows.

The slide came amid weakness in emerging markets triggered by a devaluation of the Chinese yuan. It came with a delay, though, after the central bank supported the rupee before and after an Aug. 17 general election won by a pro-reform coalition.

It was hard to give a realistic level for the rupee, said newly reappointed Finance Minister Ravi Karunanayake, but he expressed confidence the currency would stabilise in a few days.

"It is not a free float that will be allowed to be a free for all. We are very cautiously looking at very realistic situations in the world trend," Karunanayake told Reuters.

He said the government could manage to service its debt without difficulty, despite the depreciation in the currency, which has fallen 4.6 percent this year.

The central bank's move came a day after it received $1.1 billion from a $1.5 billion swap agreement with the Reserve Bank of India (RBI).

"This correction is probably overdue by 2 to 3 months. They might have waited till the inflows come in from the RBI swap arrangement and reach political stability," said Shiran Fernando, an economist at Colombo-based Frontier Research.

The rupee was quoted between 136.50 and 139.00 per dollar from Thursday's close of 134.75, dealers said.

"I don't think it will go beyond 139.00 because the central bank will intervene to curb excess volatility and the market will correct by itself," one dealer said.

In contrast, the Indian rupee has fallen around 3.9 percent, the Malaysian ringgit by 8 percent, and Indonesia's rupiah has fallen 4.5 percent since China devalued the yuan on Aug. 11.

The central bank usually directs the market through state banks trading the dollar.

The central bank told a meeting with forex dealers on Thursday that it would allow the rupee to float from Friday, according to sources aware of the proceedings.

(reuters.com)