Rupee falls as importers step up dollar buying.

The rupee fell sharply on Monday as domestic oil refiners stepped up dollar purchases given the recent run up in world oil prices, with a fall in local stocks adding to losses.

But a sharper slide in the rupee was likely prevented due to continued robust capital flows into local equities and debt, traders said.

The rupee ended at 49.2150/2250 to the dollar, down from Friday's close of 48.935/945. It moved in a band of 48.9400 to 49.3050 during the session.

"Equities moved deep into the red and there was dollar buying from importers, but I think weakness in rupee is likely to be very limited," said Naveen Raghuvanshi, associate vice president of foreign exchange trading at Development Credit Bank.

India imports about 80 percent of its oil requirements and oil companies are the biggest buyers of dollars in the local currency market.

Oil companies have increased dollar purchases in the last few days as rising tensions between Iran and the West have pushed oil prices higher on fears of supply disruptions. Iran is a key supplier to India.

Brent crude slipped below $125 per barrel on profit-taking after five days of gains pushed oil to 10-month highs on worries tension over Iran's disputed nuclear programme could lead to a disruption in Middle East supplies.

The BSE Sensex dropped 2.7 percent on Monday to post their biggest fall in five months.

Macquarie in a research note on Friday said India should brace for an oil shock as crude oil has hit an all-time high in rupee terms.

The research house said that high oil prices will raise macro concerns and lead to de-rating of Indian equities. It added that high oil prices can push up inflation again and prematurely stall the rate-easing cycle.

DCB's Raghuvanshi expects foreign inflows will stay robust and help the rupee strengthen and move to 48.88 to the dollar, a strong resistance, which if broken could take the currency to 48.60, a level last seen on February 6.

Foreign funds have invested more than $9 billion in Indian equities and debt so far in 2012, according to the Securities and Exchange Board of India, an indication of investor appetite in Asia's third largest economy.

Apart from inflows, fears that the Reserve Bank of India will conduct an active and strong intervention in local foreign exchange market will help put brakes on any sharp selling pressure on rupee.

In December, the RBI sold more than $9 billion in the spot and forwards markets, its biggest intervention in nearly three-and-half years, after the rupee hit a record low of 54.30.

The RBI has also taken administrative measures to curb speculation in currency market while cautiously taking steps to boost inflows.

One-month offshore non-deliverable forward contracts were at 49.70.

In the currency futures market, the most-traded near-month dollar-rupee contracts on the National Stock Exchange, the MCX-SX and the United Stock Exchange all ended around 49.62, on a total volume of $4.36 billion.

Source : in.reuters.com