Rupee recovers as RBI moves on oil imports

MUMBAI (Reuters) - The rupee rebounded on Thursday from a record low after the Reserve Bank of India's move to provide dollars directly to oil companies provided relief to the currency, while a recovery in emerging market currencies also helped offer support.

The RBI decision is aimed at removing a major source of dollar demand from the spot market - worth $400 million to $500 million daily - and so reduce downward pressure on the Indian currency.

The rupee rose as high as 66.85 per dollar shortly after the open, up sharply from a record low of 68.85 per dollar on Wednesday when the currency posted its biggest single-day percentage fall since October 1995.

The Reserve Bank of India (RBI) said it was providing a special window with immediate effect to sell dollars to Indian Oil Corp Ltd , Hindustan Petroleum Corp , and Bharat Petroleum Corp Ltd . Oil represents India's biggest import item.

However, analysts said the RBI measures alone would not lead to a sustained rupee recovery unless the government can pass measures that can convince markets of its willingness to tackle India's fiscal and current account deficits and slowing growth.

"The measure is unlikely to arrest the decline in the INR with the authorities increasingly trying to find new means to stem the rout in the currency," Mitul Kotecha, head of global markets research for Asia at Credit Agricole in Hong Kong, said in an email to clients.

Thursday's rupee bounce also boosted shares and bonds, underscoring how movements in domestic markets are increasingly being driven by the beleaguered currency.

The Nifty rose 0.6 percent while benchmark 10-year bond yields fell 15 basis points to 8.81 percent.

The improved sentiment was also helped as Asian shares recovered while emerging market currencies stabilised as fears abated that U.S.-led forces would soon launch a military strike against Syria.

The defence of the rupee has largely rested so far on the RBI's shoulders. Yet its plan to drain cash from markets and curb speculative trading is becoming increasingly controversial as bond yields have surged, raising borrowing costs in an economy already growing at its slowest pace in a decade.

At the same time, the government has struggled to inspire confidence despite a slew of measures to raise dollars from abroad and curb imports of gold and oil that have most contributed to a record current account deficit.

Prime Minister Manmohan Singh's ruling coalition, which faces elections by May next year, is banking on passing land acquisition rules that would replace laws dating back to the 19th century.

The Lok Sabha is set to discuss on Thursday the controversial bill on how to compensate farmers for land acquired for infrastructure and industrial projects, an action that aims to speed up major projects, but which critics say could raise costs and actually slow down the acquisition process.

(Reporting by Rafael Nam; Additional reporting by Subhadip Sircar; Editing by Neil Fullick)