The Indian rupee is likely to remain in the Rs 94.5-96 per US dollar range in the near term, as large dollar inflows through FCNR deposits and external commercial borrowings (ECBs) have not translated into equivalent appreciation, according to a Bank of Baroda research report.
The report said these inflows have largely been added to the Reserve Bank of India’s foreign exchange reserves instead of entering the market. This has limited the impact of higher dollar inflows on the exchange rate, while the rupee continues to be influenced by fundamentals, RBI intervention and market sentiment.
The report analysed monthly currency movements from January 2022 to June 2026, taking into account changes in forex reserves, RBI spot and forward market operations, foreign portfolio investor (FPI) flows and the dollar-euro exchange rate.
Among the variables examined, RBI intervention through spot and forward operations showed a significant relationship with rupee movements. The two operations together had an explanatory power of 34 per cent, compared with 25 per cent for spot intervention and 19 per cent for forward operations when assessed separately.
The findings indicate that using spot and forward operations together could have a greater role in currency management. However, the report noted that the variables examined collectively accounted for no more than 40 per cent of the variation in the rupee, pointing to the influence of other market factors.
Dollar Inflows Build Reserves
The report said the rupee could theoretically have appreciated more sharply following the increase in dollar inflows. However, the funds have largely been added to RBI reserves rather than being infused into the market, reducing their immediate impact on the currency.
Changes in forex reserves had an explanatory power of only 18 per cent in the analysis. This suggests that a sharp rise in reserves following dollar inflows does not necessarily result in a proportionate movement in the rupee’s exchange rate.
The rupee has depreciated by around 28 per cent between January 2022 and August 2026, moving from an average of Rs 74.44 per US dollar to Rs 95.47. Over the same period, the dollar gained 2.4 per cent against the euro, while the yen, Indonesian rupiah and South Korean won depreciated by 38 per cent, 24 per cent and 17 per cent, respectively.
Currency Moves Remain Complex
FPI flows were significant when considered separately but lost significance when combined with the other variables. The report said this indicates that currency movements are driven through multiple channels rather than by one dominant factor.
Market sentiment also accounts for a substantial part of the rupee’s movement not captured by the analysis. The report specifically cited the timing of importer and exporter purchases, along with remittance flows, as factors influencing currency movements.
The Bank of Baroda report said the combination of fundamentals, RBI intervention and market sentiment makes it difficult to attribute rupee movements to any single factor. Based on the current assessment, the report expects the rupee to remain in the Rs 94.5-96 per US dollar range in the near term.
