MUMBAI (Reuters) - The Indian rupee is set to open higher on Friday, helped by the U.S. dollar reversing a large part of the rally that was spurred by Donald Trump's U.S. election win and the drop in U.S. Treasury yields.

The 1-month non-deliverable forward indicated the rupee will open marginally higher than its close of 84.3725 per U.S. dollar in the previous session when the currency also hit a lifetime low of 84.3775.

The dollar index dropped 0.7% on Thursday, reversing nearly half of the rally prompted by Trump's victory. It was similar for fixed income, with U.S. rates pulling back following the surge on election day.

"More likely than not, this is just profit booking (on dollar-long positions), and I would not read much into this," a currency trader at a bank said.

"Overall, I think the bias on the dollar will remain on the upside till at least December," and the "rupee, more likely than not, will see 85."

The rupee's decline in the last two sessions is significant in that the Reserve Bank of India had maintained a stranglehold on the currency previously.

That the central bank has allowed the rupee to convincingly weaken past 84 indicates it is likely prepared to allow larger two-sided moves, according to traders.

Foreign equity outflows have been a major sore point and are part of the reason the rupee is near all-time lows. Overseas investors have taken out over $1.5 billion from Indian equities this month after withdrawing nearly $11 billion in October.

FED RATE CUT

The Federal Reserve cut rates by 25 basis points on Thursday, as expected, and Chair Jerome Powell flagged a careful, patient approach to future reductions.

The Fed is probably worried about the inflation implications that Trump's policies are likely to fuel when it comes to deciding on rate cuts, ING Bank said in a note.

KEY INDICATORS:

** One-month non-deliverable rupee forward at 84.42; onshore one-month forward premium at 9.5 paisa

** Dollar index at 104.50

** Brent crude futures down 0.4% at $75.3 per barrel

** Ten-year U.S. note yield at 4.34%

** As per NSDL data, foreign investors sold a net $440.9 mln worth of Indian shares on Nov. 6

** NSDL data shows foreign investors sold a net $38.6 mln worth of Indian bonds on Nov. 6

(Reporting by Nimesh Vora; Editing by Savio D'Souza)

By Nimesh Vora