RBI's Dec FX market intervention biggest in 3-1/2 years

A man pulls a hand-drawn cart in front of the Reserve Bank of India (RBI) building in Mumbai January 24, 2012.

MUMBAI (Reuters) - The Reserve Bank of India (RBI) sold more than $9 billion in the spot and forwards market in December 2011, its biggest intervention in nearly three-and-half years to prop up the local currency from its record low of 54.30.

Traders expect the central bank to support the rupee as they believe its rebound this year could be cut short as the economy struggles with twin deficits and high inflation.

The RBI's victory in reversing a sharp decline in the rupee may be short-lived and the currency will remain vulnerable unless the problems of hefty fiscal and current account deficits are addressed.

The central bank sold a net $7.81 billion in the spot foreign exchange market in December, up from $2.92 billion in the previous month, the bank said in its bulletin for February.

The RBI net sold $1.37 billion in the forwards market in December, lower than $1.62 billion in the previous month, taking the total dollar sales in December to $9.18 billion, its biggest forex market intervention since October 2008.

The rupee has rebounded nearly 8 percent since January after plunging nearly 16 percent in 2011 when it was the worst performing major Asian currency against the dollar.

"They are unlikely to allow the rupee to cross the 50 per dollar mark very easily," said a senior forex dealer at a foreign bank, referring to the central bank.

"It would prefer selling a billion dollars now rather than 4 to 5 billion dollars at higher levels."

The rupee ended at 49.19/20 to the dollar on Monday, stronger than its Friday's close of 49.40/41.

(Reporting by Suvashree Dey Choudhury and Aditya Phatak; editing by Malini Menon)