Indian rupee gains on drop in oil, stock market rally

* Rupee edges higher as oil retreats

* Stocks rally renews hopes of capital inflows

* Inflation at 11.91 percent for week ended July 5
(Updates to close)

By Swati Bhat

MUMBAI, July 17 (Reuters) - The Indian rupee <INR=IN>
strengthened on Thursday, bolstered by a further drop in global
crude prices and a rally in local shares, which renewed hopes
for further foreign fund inflows.

The partially convertible rupee ended at 42.81/82 per
dollar, 0.6 stronger than 43.07/08 at Wednesday's close. It had
hit a 15-month low of 43.50 earlier this month.

"The rupee rose mainly because oil prices having come down
and also the share market rally," the chief dealer with a
state-run bank said.

Oil CLc1 prices fell around a dollar on Thursday,
extending this week's steep losses, after evidence mounted of
fading demand in the United States and as a fresh diplomatic
initiative from Washington diluted tension over Iran. See
[O/R].

Indian shares snapped a five-day losing streak and rose 4.3
percent on Thursday, comforted by cheaper oil and easing fears
over a global credit crisis. Traders were wary of inflation,
which economists polled by Reuters expected to top 12 percent.
See [.BO].

Data released later showed annual wholesale price inflation
at 11.91 percent in early July, marginally above 11.89 percent
in the previous week.

"The market had already factored in inflation close to the
12-percent level, so this will not have a lot of impact on the
market," a dealer with a private bank said.

The stock index is down more than 35 percent in 2008,
making it one of the worst Asian performers, with foreign funds
having pulled out $7.2 billion so far. That has been a major
factor in the rupee's nearly 8 percent decline.

The local unit had risen more than 12 percent in 2007, when
foreign investors pumped $17.4 billion into a record breaking
stock market.
(Editing by Mark Williams)