The Indian rupee firmed slightly on Friday, tracking mild gains across Asian currencies and aided by interbank dollar sales, with traders pointing to a pickup in exporter hedging.

The rupee was last at 88.6350 per U.S. dollar as of 10:20 a.m. IST, compared with 88.7050 in the previous session.

Regional currencies rose 0.1%–0.3%, while the dollar index held near 100.1 and was set for a weekly gain as markets dialled back expectations of an imminent U.S. Federal Reserve rate cut.

Odds of a rate cut by the Fed next month have eased to about 35%, down from 50% a week earlier, per CME's FedWatch tool. Chicago Federal Reserve President Austan Goolsbee on Thursday said he is uneasy about cutting interest rates in the face of too-high inflation, remarks that signal a reluctance to support a reduction in borrowing costs next month.

While a hawkish turn in Fed expectations is a pain point for the rupee, "spot (USD/INR) is just holding for one reason which is RBI," a trader at a Mumbai-based bank said, referring to the central bank's frequent interventions to cap rupee weakness near its record low of 88.80.

The frequent dollar-selling interventions while limiting the currency's fall, have sucked up rupee liquidity from the local banking system.

With ongoing FX intervention having impacted system liquidity, we expect the RBI to restart open market bond purchases, economists at Deutsche Bank said in a note.

"Our liquidity calculation suggests that the RBI will potentially do OMO purchases of INR 1.5-2 trillion by end-March’26, and possibly more in FY27," the note said. The firm also expects the Indian central bank to cut rates by 25 basis points in December.