Indian rupee erases early rise, ends at 13-mth low

(Updates to close)

By Anurag Joshi

MUMBAI, May 15 (Reuters) - The Indian rupee erased early gains on Thursday and fell to 13-month lows on arbitrage trading by banks toward the close, and could cloud the near-term outlook for the unit.

Traders said banks sold rupees in the local market to buy the currency cheaper in the overseas non-deliverable forward (NDF) market, where participants were bearish on the rupee's prospects.

The partially convertible rupee <INR=IN> ended at 42.75/76 per dollar, the weakest since April 13, 2007, according to Reuters data and about 0.7 percent lower than Wednesday's close of 42.45/46.

It had climbed in early trade, rising as high as 42.30, on the back of a stocks rally that lifted the BSE share index 2.2 percent to its highest close in a week. See [.BO]

"We saw a bout of arbitrage between the local and NDF market in the last minutes of trade," a trader with a private bank said.

Offshore spot rates PNDF traded at 42.73/76 at the close of trade.

The rupee has eased 7.8 percent in 2008, a sharp turnaround from its 12 percent-plus rise last year.