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 121.80 billion in July Nifty index options and a net Rs 7.90 billion 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.
Copyright @Thomson Reuters 2012