Rupee inches up after RBI rate increase

The Indian rupee crept up on Thursday as a hike in the central bank's key lending rate boosted sentiment for the local unit, but gains were capped by a rise in global oil prices and a wobbly stock market.

The partially convertible rupee ended at 42.8350/8450 per dollar, 0.05 percent stronger than Wednesday's close of 42.86/87. It had hit a 13-month low of 43.21 on May 22.

"The rupee was stuck between oil being on the high side and the rate hike. But the stock market shrugged off the rate hike and ended in positive territory, so the rupee also should hold steady for a while," a dealer with a private bank said.

India's central bank raised its key lending rate for the first time in more than a year on Wednesday, and economists saw more policy tightening to come as a recent rise in state-set fuel prices threatened near double-digit inflation.

India's main stock index rebounded from an early slide to close 0.4 percent higher on Thursday, as some investors viewed concerns over the quarter-point rate hike as overdone, but analysts doubted the strength of the rally.

The benchmark index is down about a quarter in 2008, with foreign funds pulling out nearly $5.3 billion, weakening a key support for the rupee and pushing it down 8 percent this year. Oil was trading above $133 a barrel after having touched a record $139 last week.

India imports two-thirds of its oil needs and importers are the biggest buyers of dollars in the local currency market. Dealers said they expect the rupee to trade in a band of 42.70 to 42.90 on Friday, as fears the central bank will intervene to curb depreciation in the rupee if it falls below 42.90 levels continue to grip the market.