The Indian rupee pared initial losses and settled 2 paise lower at 81.92 (provisional) against the US dollar on Thursday after the RBI decided to keep the key benchmark policy rate at 6.5 per cent.

Forex traders said the Indian rupee witnessed volatility after the Reserve Bank of India (RBI) surprised the market by pausing the rate hike.

At the interbank foreign exchange, the domestic unit opened weak at 81.95 against the dollar, and finally ended the day at 81.92 (provisional), 2 paise lower from its previous close. On Wednesday, the rupee gained 42 paise to close at 81.90 against the US dollar.

The Reserve Bank of India (RBI) on Thursday decided to keep the key benchmark policy rate at 6.5 per cent even as inflation is trending above its tolerance level. The rate hike has been paused after six consecutive rate increases aggregating to 250 basis points since May 2022.

On the rupee, Reserve Bank Governor Shaktikanta Das said the Indian Rupee has moved in an orderly manner in the calendar year 2022 and continues to be so in 2023 also.

This is reflective of the strength of domestic macroeconomic fundamentals and the resilience of the Indian economy to global spillovers.

RBI remains watchful and focused on maintaining the stability of the Indian rupee, he added.

According to Dilip Parmar, Research Analyst, HDFC Securities, the local unit initially declined but strengthened following recovery in the domestic equities backed by foreign fund inflows, Parmar said.

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"With today's pause, the carry trade is back in the rupee. The spread between India’s bond yield premium over the US makes the rupee more attractive as a carry target," Parmar noted.

In the near-term, spot USDINR is expected to trade between 81.70 to 82.50 with a bearish bias, Parmar said.

Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, rose 0.08 per cent to 101.93.

Brent crude futures, the global oil benchmark, declined 0.16 per cent to $84.85 per barrel.

In the domestic equity market, the 30-share BSE Sensex closed 143.66 points or 0.24 per cent higher at 59,832.97 points. The broader NSE Nifty advanced 42.10 points or 0.24 per cent to 17,599.15 points.

Foreign Institutional Investors (FIIs) were net buyers in the capital markets on Wednesday as they purchased shares worth ₹806.82 crore, according to exchange data.

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