The rupee traded firm versus the greenback after the US dollar index retreated sharply, heading for its first monthly drop in five months, as investors doubted to what extent higher interest rates could strengthen the American currency.

The partially convertible rupee was last at 77.5040/$1 as against 77.5650/$1 at the previous close. So far in the day, the Indian currency moved in a band of 77.4770-77.8700/$1.

The US dollar index, which earlier this month had hit a near-20-year high of 105, dropped to 101.43 on Friday, its weakest level since April 25.

The index, which measures the US currency against six major rival currencies, was last at 101.54, lower than 101.66 earlier in the day.

Riskier emerging market currencies such as the rupee stand to benefit if the US dollar index cools off from multi-year highs. Over the past month, the rupee has witnessed much volatility, hitting an all-time low of 77.7850/$1 on May 17, as the surge in the dollar index has led to an exit of global funds from Indian markets.

With the US Fed clearly signalling higher interest rates, foreign investors have sold Indian equities at a ferocious pace, with their net sales for the month at Rs 39,000 crore. Overseas investors have offloaded more than Rs 2 lakh crore worth of domestic stocks since October 2021.

Data showing an increase in the RBI’s headline foreign exchange reserves are nine straight weeks of declines also buoyed market sentiment, dealers said.

The RBI has been said to have been intervening heavily in the foreign exchange market through dollar sales since Russia’s invasion of Ukraine in late February.

According to dealers, the sales of dollars by the central bank have curbed excessive volatility in the exchange rate and discouraged speculation against the rupee.

“On the domestic front, RBI FX reserves rose by $4.2bn to $597.5bn for the first time after 9 consecutive weeks of fall. The reason could be RBI’s maturity of its long forward position and the revaluation of reserve currencies,” CR Forex Advisors MD Amit Pabari said.

“RBI’s FX reserves of $600 bn are crucial to combat the sharp fall in the currency amid the likely continued fight against the rising inflation, higher oil prices, and FII outflows.”

The firm sees the rupee in a band of 76.80-77.10/$1 over the near term.