Rupee lifted by stocks; wary of oil, inflation

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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.

It ended at 43.15/16 per dollar, 0.3% 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 US holiday,” said V Rajagopal, head of currency trading at Kotak Mahindra Bank.

Indian shares rose 2.8% as investors picked bargains in the battered market after political worries eased, but the outlook was grim due to inflation and high oil prices.

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%.

India's annual inflation rate rose to 11.63% 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 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% so far in 2008, after having risen 12.3% last year. One-month offshore non-deliverables forward contracts were at 43.52/62 per dollar, weaker than the onshore rate.

Meanwhile, bond yields jumped as much as 37 basis points to seven-year highs above 9% as auction results showing weak demand added to worries about central bank action after a further rise in inflation.

The cut-off prices at auctions of Rs 10,000 crore of government bonds were sharply lower than market expectations.

The yield on the 10-year benchmark paper ended at 9.16%, higher than Thursday's close of 8.81%. In late trade it hit a high of 9.18%, its highest since early October 2001. The first stage of the reserves increase takes effect on Saturday, draining about Rs 8,000 crore of funds from the banking system. The second phase takes effect on July 19.