By Swati Bhat
MUMBAI (Reuters) - The rupee on Wednesday posted its biggest yearly fall since a balance of payments crisis in the early 1990s as the global financial crisis triggered a surge in capital outflows, but is expected to gain early in 2009.
A sharp stock market sell-off as rattled investors dumped riskier assets, during which foreign investors pulled out a record $13.4 billion, helped drag the rupee down 19.1 percent.
Dealers said a likely improvement in the current account due to the collapse in oil prices and declining costs of other commodities would improve sentiment for the local unit in the new year, although possible further losses in share markets may weigh.
"We are somewhat optimistic on INR (the rupee). Expect it to strengthen gradually ... on an improved current account, halt in outflows from foreign portfolio investors, resumption in activity in short-term funding markets and continued policy support," said Vikas Agarwal, strategist at JP Morgan.
"Commodity prices are not likely to see an uptrend, so that eases the pressure on trade," said Shubhada Rao, chief economist at Yes Bank.
The dollar has risen 23.6 percent against the rupee in 2008, the biggest single-year rise since 1991's balance of payments crisis, triggered by a spike in oil prices after the first Gulf War, when the U.S. unit gained 42.2 percent versus the rupee.
The partially convertible rupee closed 2008 on Wednesday at 48.70/72 per dollar, weaker than its previous close of 48.47/49. Over the last two years, the rupee's movement has largely been driven by capital flows into and out of the local equity market. Last year, record inflows of $17.4 billion helped the rupee rise 12.3 percent.
India's current account deficit widened to a record $12.54 billion in the July-September quarter from a revised $4.3 billion in same period a year earlier, the central bank said on Wednesday.
Though not all analysts agreed the rupee had put the worst behind it, most were certain the medium-term would be bullish.
"The rupee may touch 46 by March or April and then bounce back to 50. Things are still hazy on the global front and the stock markets haven't bottomed out as yet," said V. Kumar, chief dealer at State Bank of Travancore.