The Indian rupee weakened on Monday, after having risen in early trade, as oil refiners bought dollars in the local currency market to meet month-end import commitments. The partially convertible rupee ended at 42.55/56 per dollar, down 0.7 percent from Friday's close of 42.26/27 and off an early high of 42.1950. It rose to 41.82 per dollar last week, its highest since May 12.
"The rupee weakened mainly due to month-end dollar demand from oil companies. There was some major inflow in between which gave the rupee interim relief but again (oil) demand picked up," said V. Rajagopal, head of forex trading at Kotak Mahindra Bank.
Oil steadied above $124 a barrel on Monday, supported by rebel attacks on the oil industry in key producer Nigeria. India imports nearly two-thirds of its oil needs and payments are made in dollars. High oil prices widen India's trade deficit and exert downward pressure on the rupee. Foreigners selling their local portfolio holdings have weakened a key support for the rupee in recent times, helping push the local unit down 7.4 percent so far in 2008.
Foreign funds have sold a net $6.6 billion worth of Indian shares so far this year, after having bought a record $17.4 billion in 2007. The Reserve Bank of India will hold its quarterly monetary policy review on Tuesday and is widely expected to raise its key lending rate by 25 or 50 basis from 8.5 percent, a Reuters poll showed.
"It looks like the rupee will continue in this mode with more weakness after the policy tomorrow, probably 42.60 levels and then it may weaken to 42.80. But much more weakness is not expected as of now," Rajagopal said.