After suffering multiple lows over the year, rupee may now see some stability against the US dollar. The currency is likely to remain in the Rs 94.5-96 per dollar range in the near term, despite sizeable dollar inflows through FCNR deposits and external commercial borrowings (ECBs), according to a Bank of Baroda research report.The report said the inflows have largely gone into the Reserve Bank of India’s reserves instead of entering the market. This has limited the extent to which the additional dollar supply could have translated into appreciation in rupee.“In the current situation a range of Rs 94.5-96 looks likely in the near term,” the report said. It added that sharp appreciation of the rupee, which could theoretically have followed the increase in dollar inflows, has been limited as the inflows “have not been infused into the market but added to reserves.”The report’s analysis suggests that the exchange rate cannot be explained by dollar flows or any other individual factor in isolation. Rupee movements have been shaped by a combination of fundamentals, intervention by the RBI and market sentiment.The domestic currency has lost around 28 per cent since January 2022. The rupee’s average exchange rate moved from Rs 74.44 per dollar in January 2022 to Rs 95.47 in August 2026.Other Asian currencies also weakened during this period, although to varying degrees. The yen depreciated by 38 per cent, while the Indonesian rupiah and South Korean won fell 24 per cent and 17 per cent, respectively. In comparison, the dollar gained 2.4 per cent against the euro.To assess what has been driving these movements, the Bank of Baroda report examined monthly currency data between January 2022 and June 2026. Its analysis covered changes in foreign exchange reserves, RBI operations in spot and forward markets, FPI flows and movements in the dollar-euro exchange rate.RBI intervention emerged as one of the variables with a significant relationship with rupee movements. The relationship was stronger when spot and forward interventions were considered together. Their combined explanatory power stood at 34 per cent, against 25 per cent for spot intervention alone and 19 per cent for forward operations alone.The report said this finding suggests that the RBI’s use of both spot and forward operations together could be more effective in managing the currency.Forex reserves, on the other hand, had a relatively limited explanatory power of 18 per cent. The report said this indicates that even a sharp rise in reserves following dollar inflows does not necessarily produce a major movement in the exchange rate.FPI flows also showed a significant relationship with the rupee when examined separately. However, that significance disappeared once the other variables were considered alongside FPI flows.“The factors driving the exchange rate are through multiple routes and separating them statistically does not reveal any dominant variable,” the report said.The analysis found that the variables studied explained no more than 40 per cent of the variation in the rupee. A substantial portion of the movement remained outside what the analysis could capture.The report attributed much of this unexplained component to sentiment, including the timing of dollar purchases by importers and exporters and the flow of remittances.The findings therefore point to a currency market where movements are influenced through several channels rather than being driven by one dominant variable. Against this backdrop, the report expects the rupee to remain within the Rs 94.5-96 per dollar range in the near term.
