Mumbai, Dec 30 (PTI) The rupee dropped 5 paise to 85.53 against the US dollar in early trade on Monday, as dollar demand from importers, foreign fund outflows and a muted trend in domestic equities dented investor sentiments.

Forex traders said the rupee witnessed heavy volatility on Friday and opened on a weak note on Monday amid significant dollar demand linked to the expiry of December currency futures and maturing positions in the outstanding forwards.

At the interbank foreign exchange, the rupee opened on a weak note and fell to 85.53 against the American currency, registering a fall of 5 paise over its previous close.

On Friday, the rupee registered the steepest fall in almost two years to hit its lifetime intraday low of 85.80 before a suspected central bank intervention helped recover some of its losses and settled 21 paise lower at a record low of 85.48 against the US dollar.

"A significant FII outflow during the third quarter of this fiscal year, coupled with India's slowing growth and widening trade deficit, is expected to keep the rupee under strain. In the near-term, the USDINR pair is likely to trade within a range of 85.20 to 85.80," CR Forex Advisors MD-Amit Pabari said.

Traders further said that global markets are expected to see low volumes as the holiday season is underway in major economies like the UK and Europe.

"Global markets are bracing for heightened volatility once Donald Trump assumes power. For now, the Dollar Index is expected to hover around its elevated level of 108, while emerging market currencies are likely to remain under pressure in the near-term," Pabari said.

Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, was at 108.00.

Brent crude, the global oil benchmark, was up 0.07 per cent at USD 74.22 per barrel in futures trade.

In the domestic equity market, the 30-share BSE Sensex was trading 247.18 points or 0.31 per cent down at 78,451.89 points in morning trade, while Nifty was down 84.40 points or 0.35 per cent to 23,729.00 points.

Foreign Institutional Investors (FIIs) offloaded Rs 1,323.29 crore in the capital markets on net basis on Friday, according to exchange data.

According to the Reserve Bank of India, the country's forex reserves dropped by a further USD 8.478 billion to USD 644.391 billion for the week ended December 20. In the previous reporting week, the reserves had dropped by USD 1.988 billion to a six-month low of USD 652.869 billion.

The reserves have been declining for the last few weeks, and the drop has been attributed to revaluation along with forex market interventions by RBI to help reduce volatilities in the rupee.

The forex reserves had increased to an all-time high of USD 704.885 billion in end-September. PTI DRR DRR