Bank of America Merrill Lynch sticks to its USD/INR forecast of 57 for the end of September, saying the continued global risk uncertainty makes it too premature to say the worst is over for the local currency.
Despite positive signals such as a fall in 3-month implied option volatility to three-month lows and eased stress in short-end FX forwards, the rupee remains particularly vulnerable to global risk flows, the investment bank says.
Other indicators show how fragile confidence remains, especially given the continued policy uncertainty over fiscal and investment reforms, BofA-Merrill adds.
Foreign investors are hedging their equity exposure, having bought a net Rs 12,180 crore in July Nifty index options and a net Rs 790 crore in August contracts so far, according to the analysts.
The "dilemma index" between the current account deficit and the wholesale price index further shows "macro imbalances have yet to turn convincingly," while illustrating the RBI's tough trade-off on FX depreciation, it says.