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By Swati Bhat

MUMBAI - The Indian rupee strengthened on Tuesday to its highest level in 1-1/2 months, boosted by foreign fund inflows to equities, though traders remain wary of central bank intervention to prevent a sharp rally in the currency.

The partially convertible rupee was trading at 73.50/51 per dollar at 0755 GMT, after touching 73.45 earlier in the session - it highest since Oct. 21.

"The absence of the central bank from the market has helped the rupee break the 73.75 barrier," said a senior trader at a foreign bank. "The 73.40 is the next level to watch out for now."

The BSE and the broader NSE share indexes were trading 0.9% higher on Tuesday. The benchmark indexes ended November with gains of 11% each, driven by record inflows and on promising news surrounding vaccine efficacy rates.

The Reserve Bank of India (RBI) has been aggressively buying dollars from the spot market to prevent a sharp appreciation in the unit and ensure export competitiveness.

That led to a massive infusion of rupees in the banking system, causing money market rates to crash with the overnight interbank call rate falling on some occasions below the reverse repo rate, the lower band of the policy rate corridor.

The RBI's monetary policy committee is expected to leave interest rates unchanged on Friday, after data showed that the economy contracted less than expected in the September quarter alongside persistently high inflation.

Traders, however, are closely watching the commentary from the RBI around liquidity.

"Official preference is to soak dollar inflows to keep rupee on an even keel, which has in turn pushed up INR liquidity. This has seen the INR surface as the regional underperformer vs US dollar year-to-2020," said Radhika Rao, an economist with DBS Bank.

"The RBI is likely to ease its grip on the INR while focusing on mainstream policy and bond market stability," she added, referring to the 2021 outlook.

(Reporting by Swati Bhat, Editing by Sherry Jacob-Phillips)