Mumbai, Dec 5 (PTI) The rupee on Friday gave up its initial gains and settled for the day lower by 6 paise at 89.95 against the US dollar, after the Reserve Bank cut the key benchmark interest rate for the first time in six months.

Forex traders said the Reserve Bank of India's (RBI) rate cut will weigh on the rupee, but RBI's decision to purchase government bonds worth up to Rs 1 lakh crore through open market operations (OMO), combined with a USD 5 billion buy-sell swap, will support the local currency.

At the interbank foreign exchange market, the rupee opened at 89.85 against the US dollar and gained ground, touching 89.69 in morning deals, registering a 20-paise gain from its previous close.

After the RBI's monetary policy announcement, the rupee lost ground and fell to 90.06 against the American currency, a 16-paise decline from its previous close of 89.89. The currency is down almost 5 per cent against the dollar this year, the worst performer in Asia.

The local unit finally settled for the day lower by 6 paise at 89.95 against the American currency.

"Beyond the rate cut, RBI's decision to purchase government bonds worth up to Rs 1 lakh crore through OMO, combined with a USD 5 billion buy-sell swap, marks a decisive effort to restore durable liquidity and stabilise currency markets after the rupee's sharp depreciation," said Sachin Bajaj, Executive Vice President & Chief Investment Officer, Axis Max Life Insurance.

The RBI on Friday cut the key benchmark interest rate for the first time in six months and took steps to boost liquidity to support a "goldilocks" economy amid high US tariffs.

Reserve Bank Governor Sanjay Malhotra said the central bank does not target any band for the rupee in the forex market, and allows the domestic currency to find its own correct level.

"We don't target any price levels or any bands. We allow the markets to determine the prices. We believe that markets, especially in the long run, are very efficient. It's a very deep market," he said while replying to a question on rupee depreciation at a post-monetary policy press meet.

Malhotra said fluctuations in the market keep occurring, and the RBI's effort is always to reduce any abnormal or excessive volatility. "And that is what we will continue to endeavour," he added.

In its bi-monthly monetary policy, the RBI announced three-year USD/INR buy-sell swaps of USD 5 billion this month. When asked if this is aimed at checking rupee depreciation, Malhotra said, "It is a liquidity measure. It is not to support the rupee".

The governor further said the country has sufficient foreign exchange reserves and that the current account is manageable, and that, given the strong fundamentals of the economy, the country should witness strong capital flows going forward.

Meanwhile, the dollar index, which gauges the greenback's strength against a basket of six currencies, was trading 0.03 per cent lower at 98.96.

Brent crude, the global oil benchmark, rose 0.02 per cent to USD 63.27 per barrel in futures trade.

On the domestic equity market front, Sensex jumped 447.05 points to settle at 85,712.37, while the Nifty climbed 152.70 points to 26,186.45.

Foreign institutional investors sold equities worth Rs 438.90 crore on a net basis on Friday, according to exchange data.

Reserve Bank's weekly data released on Friday showed India's forex reserves dropped by USD 1.877 billion to USD 686.227 billion during the week ended November 28. In the previous reporting week, the overall reserves had declined by USD 4.472 billion to USD 688.104 billion. PTI DRR HVA