Indian rupee weakens to 8-½ mth low as oil weighs

(Updates to close)

By Anurag Joshi

MUMBAI, May 7 (Reuters) - The Indian rupee fell to an 8-½ month low on Wednesday as record oil prices pushed up dollar demand from refiners, raising concerns of a widening trade deficit.

India imports 70 percent of its oil needs, and crude refiners such as HPCL (HPCL.BO: Quote, Profile, Research) and BPCL (BPCL.BO: Quote, Profile, Research) are among the biggest Indian buyers of dollars.

The partially convertible rupee <INR=IN> closed at 41.36/37 per dollar, off an intraday low of 41.41, the weakest since Aug. 20, according to Reuters data. It ended at 40.95/96 on Tuesday.

A senior dealer with a state-run bank estimated oil firms bought at least $500 million in Wednesday's trade. Oil CLc1 rose to a record high of $122.73 a barrel on Tuesday [O/R].

"Demand may be a bit lower on Thursday. If crude slips overnight, that would improve the sentiment for the rupee," a trader with a foreign bank said.

Higher costs for oil were one factor behind a 35.5 percent widening in India's trade deficit <INTRD=ECI> to $80.4 billion in the fiscal year ended March.

Traders also said a few banks sold rupees in an arbitrage play to take advantage of weaker rates in the overseas non-deliverable forward (NDF) <PNDF=> market.

"At one point, the differential between the local and NDF market was 10 paise (0.10 rupee) for one-month forward rates," a trader with a private bank said. (Editing by Ranjit Gangadharan)