June 27 (Bloomberg) -- India's rupee fell by the most in three weeks after crude oil rose to a record, spurring demand for dollars needed to import the commodity.

The rupee is set for its worst quarter in a decade as accelerating inflation prompted global funds to sell more local equities than they bought this year. Oil's rally caused the rupee to retreat from a three-week high it touched yesterday after the central bank raised its benchmark interest rate this week by the most since 2000.

``Dollar demand from refiners was always persistent, which has strengthened after the latest spurt in crude prices,'' said Vikas Babu, a currency trader at state-owned Andhra Bank in Mumbai. ``Overseas investors also have a negative outlook on the rupee which is why they are selling.''

The rupee dropped 0.5 percent to 42.88 against the dollar at the 5 p.m. close in Mumbai, according to data compiled by Bloomberg. That is the biggest fall since June 9. It may decline to 43 next week, Babu said.

The rupee is the second-worst performer among the 10 most- traded Asian currencies excluding the yen this quarter as the benchmark Bombay Stock Exchange Sensitive Index, or Sensex, headed for a second quarterly loss. The index has lost 32 percent this year, following a 47 percent gain in 2007.

Overseas investors sold a net $6.12 billion in local shares this year, data provided by the Securities & Exchange Board of India show, more than a third of their record $17.2 billion in net purchases last year.

India's oil imports averaged $7.7 billion a month this year, compared with $5.4 billion in 2007, government data show.

Crude for August delivery rose to a record of as much as $142.26 a barrel on the New York Mercantile Exchange.

To contact the reporter on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net.

Last Updated: June 27, 2008 08:10 EDT