Mumbai, Mar 24 (PTI) The rupee appreciated 12 paise to 85.86 against the US dollar in early trade on Monday, as strong domestic inflows provided the much-needed support.

However, lurking risks -- ranging from crude oil prices to liquidity constraints -- continue to pose challenges for the local unit, forex traders said.

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At the interbank foreign exchange, the rupee opened at 85.93 against the greenback, then gained some ground and touched 85.86, up 12 paise from its previous close.

On Friday, the rupee appreciated 38 paise to close at 85.98 against the US dollar.

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"Despite its recent gains, the rupee remains vulnerable to external shocks, particularly crude oil price fluctuations. Brent crude surged towards USD 72 per barrel as geopolitical tensions escalated in the Middle East," CR Forex Advisors MD – Amit Pabari said.

Meanwhile, Foreign institutional investors (FIIs) purchased equities worth Rs 7,470.36 crore on a net basis on Friday, according to exchange data.

"The inflows were largely driven by the FTSE March review and robust fundraising activities. State-run enterprises raised Rs 14,000 crore, while Indian states mobilized Rs 40,100 crore through debt sales.

"Additionally, Non-Banking Financial Companies (NBFCs) issued Rs 16,400 crore in bonds, enhancing liquidity and reinforcing investor confidence -- offering a cushion for the rupee," Pabari said.

Meanwhile, the US dollar index, which gauges the greenback's strength against a basket of six currencies, was trading 0.06 per cent higher at 104.15.

Brent crude, the global oil benchmark, was trading 0.37 per cent lower at USD 71.89 per barrel in futures trade.

In the domestic equity market, the 30-share BSE Sensex was trading 563.05 points, or 0.73 per cent, higher at 77,468.56 points, while the Nifty was up 153.20 points, or 0.66 per cent, at 23,503.60 points.

Meanwhile, the country's forex reserves increased by USD 305 million to USD 654.271 billion during the week ended March 14, the RBI said on Friday.

In the previous reporting week, the overall reserves rose by USD 15.267 billion to USD 653.966 billion and registered the sharpest weekly rise in two years.

The spike in foreign reserves was partly attributed to the USD 10 billion forex swap done by the Reserve Bank of India. PTI

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