Rupee likely to trade in Rs 94.5-96 range in near term as dollar inflows fail to lift currency: Report

The Indian rupee is expected to hover around Rs 94.5-96 per US dollar in the short term, according to a research report by Bank of Baroda. Despite large inflows of dollars through FCNR deposits and external commercial borrowings, the currency has not appreciated proportionately as the funds have primarily bolstered the Reserve Bank of India's reserves.

This report suggests that the rupee's movement is influenced by a mix of fundamental factors, Reserve Bank of India interventions, and market sentiment, making it challenging to attribute currency fluctuations to a single cause.

The rupee has depreciated by approximately 28% since January 2022, falling from an average of Rs 74.44 per dollar to Rs 95.47 in August 2026. During the same period, the dollar increased by 2.4% against the euro, while the yen, Indonesian rupiah, and South Korean won depreciated by 38%, 24%, and 17%, respectively.

Analyzing monthly currency movements from January 2022 to June 2026, the report identified RBI's spot and forward market operations as having a significant relationship with the rupee's movements, together accounting for 34% of the explanatory power. When considered separately, spot intervention accounted for 25% and forward operations for 19%.

Changes in forex reserves explained only 18% of the variations, indicating that a significant increase in reserves following dollar inflows may not substantially alter the exchange rate. The role of foreign portfolio investments (FPI) was deemed significant when examined independently but diminished significance when combined with other variables.

The report emphasizes the complexity of currency movements, stating that no single factor dominates the exchange rate. Instead, various factors interact in multiple ways, and statistical separation does not reveal any dominant variable. Furthermore, sentiment, encompassing the timing of importer and exporter purchases, remittances, and other elements, significantly contributes to the fluctuations not captured by the analysis.