Indian rupee nears 13-mth lows, trade gap in focus

(Updates to early deals)

MUMBAI, May 21 (Reuters) - The partially convertible Indian rupee <INR=IN> fell towards 13-month lows on Wednesday as record oil prices raised worries of a deteriorating trade deficit against a backdrop of slowing capital inflows.

At 9:38 a.m. (0408 GMT), the rupee was at 42.75/76 per dollar, 0.3 percent weaker than Tuesday's close of 42.635/640. It hit 42.92 last Friday, its weakest since mid-April 2007.

"Dollar/rupee opened up today because of oil, but there seems to be some good selling at higher levels. Exporters may come in later," said Indrajit Sengupta, a currency dealer at state-run Canara Bank.

"It seems to be an interbank play for now. The rupee should be in a 42.60-42.80 band for the day, and if it breaks above 42.80, then the rupee may easily fall to 43 per dollar."

Oil CLc1, India's biggest import, has surged to record highs over $129 a barrel, raising the risk of a widening trade deficit which could put downward pressure on the rupee.

India imports more than two-thirds of its oil needs, and crude refiners are the biggest buyers of dollars. The country's oil import bill shot up by more than a third in 2007/08 because of soaring oil prices, and the trade deficit widened by a similar percentage.

Added to that, capital inflows into stocks have slowed down significantly, with foreigners being net sellers of $2.7 billion of shares so far in 2008, after buying a record $17.4 billion in 2007. (Reporting by Saikat Chatterjee; Editing by John Mair)