Rupee lifted by stocks; wary of oil, inflation

By Swati Bhat

MUMBAI (Reuters) - The rupee strengthened on Friday as a rise in local shares eased some immediate concerns of more capital outflows, but its gains were limited by high oil prices and further rise in annual inflation.

The partial convertible rupee ended at 43.15/16 per dollar, 0.3 percent stronger than Thursday's close of 43.30/31. It had hit a 15-month low of 43.50 on Tuesday.

"The rupee is stronger mainly because of gains in the stock market, otherwise the general activity in the market was lower as it is a U.S. holiday," said V. Rajagopal, head of currency trading at Kotak Mahindra Bank.

Indian shares rose 2.8 percent as investors picked bargains in the battered market after political worries eased, but the outlook was grim due to inflation and high oil prices. On the week, the stock market fell 2.5 percent, and it is down by a third in 2008.

Foreign funds have sold a net $6.6 billion worth of Indian stocks so far this year. In 2007, they had bought a record $17.4 billion, when the index had risen 47 percent.

India's annual inflation rate rose to 11.63 percent in late June, above forecasts and its highest since the series began in 1995, which analysts said raised the chances of an interest rate increase this month to follow the two in June.

Oil, India's biggest import was trading above $144 a barrel, close to the record hit on Thursday.

High oil prices widen India's trade deficit, and exert downward pressure on the rupee. The rupee has fallen 8.7 percent so far in 2008, after having risen 12.3 percent last year.

One-month offshore non-deliverables forward contracts were at 43.52/62 per dollar, weaker than the onshore rate.