Rupee Expected to Stay Between Rs 94.5 and Rs 96 in Near Term Despite Dollar Inflows: Report

The Indian rupee is expected to remain in the range of Rs 94.5 to Rs 96 against the US dollar in the near term, according to a research report by Bank of Baroda. The report said substantial dollar inflows through Foreign Currency Non-Resident (FCNR) deposits and External Commercial Borrowings (ECBs) have not resulted in a corresponding appreciation of the rupee because much of the incoming foreign currency has been absorbed into the Reserve Bank of India's foreign exchange reserves.

According to the report, the rupee's movement is being influenced by several factors at the same time, including economic fundamentals, RBI intervention and market sentiment. This makes it difficult to link changes in the exchange rate to any single factor. Based on the current market conditions, the report expects the rupee to remain within the Rs 94.5-96 range in the near term.

The report noted that the additional dollar inflows could theoretically have provided stronger support to the rupee. However, since the funds have largely been added to the country's foreign exchange reserves instead of being released into the market, their impact on the currency has been limited.

The rupee has experienced a significant decline over the past few years. Its average exchange rate moved from Rs 74.44 per US dollar in January 2022 to Rs 95.47 in August 2026, representing a depreciation of around 28 per cent. During the same period, the US dollar gained about 2.4 per cent against the euro, while the Japanese yen, Indonesian rupiah and South Korean won weakened by approximately 38 per cent, 24 per cent and 17 per cent, respectively.

Bank of Baroda's research examined monthly currency movements between January 2022 and June 2026. The analysis considered changes in foreign exchange reserves, RBI operations in the spot and forward markets, foreign portfolio investor flows and movements in the dollar-euro exchange rate. The study found that RBI intervention through spot and forward market operations had a notable relationship with movements in the rupee. When both forms of intervention were considered together, they explained around 34 per cent of the variation in the currency. Spot intervention alone accounted for about 25 per cent, while forward operations explained roughly 19 per cent.

At the same time, changes in foreign exchange reserves had relatively limited explanatory power, accounting for around 18 per cent of rupee movements. This suggests that a rise in forex reserves following large dollar inflows does not necessarily result in a significant immediate change in the exchange rate.

Foreign portfolio investment flows were found to be relevant when assessed independently, but their significance declined when other factors were included in the analysis. The report therefore concluded that the rupee is influenced by multiple factors operating through different channels rather than by one dominant variable.

The variables included in the study explained less than 40 per cent of the overall movement in the rupee. The remaining variation was attributed to factors that are more difficult to measure, including market sentiment and the timing of foreign currency purchases by importers and exporters, as well as remittance flows. With these factors continuing to influence the currency market, the Bank of Baroda report expects the rupee to remain broadly within the Rs 94.5-96 per dollar range in the near term.

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