By PRASANTA SAHU And SUDEEP JAIN NEW DELHI – The Indian government Wednesday dampened market expectations that the central bank would sell dollars directly to oil importers at a fixed daily rate, with a senior finance ministry official saying there are no such plans to support the battered rupee. The comment could hurt the rupee because oil importers -- which account for about one of every $10 transacted in the market -- are a significant reason for the recent surge in demand for the greenback. Most analysts believe that the direct selling of the greenback to oil importers -- a mechanism referred to as a "dollar window" -- would isolate a key source of demand from the broader market. This would ease pressure on the rupee as India's oil companies alone buy $2 billion-$3 billion of the greenback every week. The finance ministry official's comments to reporters were out of sync with a statement earlier Wednesday by C. Rangarajan, chairman of the influential Prime Minister's Economic Advisory Council. Mr. Rangarajan had said that selling dollars directly to oil companies could be an option to limit the rupee's fall. The Indian rupee has been in a furious downward spiral over the past week, with the dollar punching through key barriers every day to continue notching up all-time highs. Since the middle of March, the local unit has fallen more than 10% and is now more than 22% lower than a year ago. Wednesday afternoon in India, the dollar was trading at 56.08 rupees after touching a record high of 56.22 rupees. The central bank is believed to have been in the market heavily in recent days -- including Wednesday -- but with little effect. While a weak rupee helps India's exporters by making their products and services cheaper, it makes imports -- especially oil -- more expensive and drives up already high inflation. The rupee's latest slide began after the federal budget in March shook investor confidence and led to a large outflow of cash. The budget unveiled proposals that many believe are detrimental to foreign investor sentiment, including tax proposals giving authorities sweeping powers to examine deals they feel are structured solely to avoid taxes. The pain is aggravated by India's yawning fiscal and current account deficits. The rupee's fall picked up pace recently, with the dollar rising against most currencies in a flight to safety sparked by the possibility of Greece leaving the euro zone. Asian markets and commodities fell across the region Wednesday after a former Greek prime minister said preparations for an exit from the euro zone are being considered. The comments sent investors to the U.S. dollar in overnight trading, with the euro stabilizing in Asia at $1.2669. The rush to the greenback symbolized a diminishing risk appetite, which has pushed down commodity prices as well. Foreign exchange traders in India are refusing to stick their necks out and put a bottom to the rupee. But they agree that a dollar window for oil companies would help. "The impact would depend on how many dollars they [the RBI] provide, but it would be much more effective than direct intervention," said Vivek Rajpal, a strategist with Nomura India. But the finance ministry official who said there are no plans for direct sales added that the oil companies have enough cash at the moment, and that global crude prices are falling anyway. He also said reforms on foreign direct investment in multi-brand retail and civil aviation are expected soon, which will bring in overseas funds and provide support to the rupee. Write to Prasanta Sahu at prasanta.sahu@dowjones.com

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