The outlook for the Indian rupee remains weak and any recovery in the currency after its inclusion in the JPMorgan index should be used to build long USD/INR positions, Nomura economists said in a note, raising the level of confidence in long USD/INR positions to maximum.

The rupee surged to near 82.80 against the US dollar following JPMorgan’s decision to include India in its flagship emerging markets index, but the currency was unable to sustain the gains and is currently slightly weaker than before India’s inclusion at 83.1125.

Nomura said passive funds are unlikely to flow before June 28, 2024, when the bonds will be included, and active fund companies should be mindful of their tracking error limits.

Actual inflows could be lower, as some real fund managers they track have invested around 2% to 3% on average, the brokerage said.

The possibility of widening India’s current account deficit and the risk of capital outflow were other reasons given by Nomura for the bearish outlook on the rupee, as well as the rising dollar and weakening of the Chinese currency.

“India’s current account may come under further pressure due to rising trade deficit,” Nomura said in a note.

The rice export ban and recent rise in oil prices could widen India’s trade deficit by $17 billion annually.

Nomura called for a rise in the dollar, pointing to the US Federal Reserve’s September projections indicating a continuation of the theme that interest rates are likely to remain high for longer.

A rise in USD/CNH will send USD/Asia higher, including USD/INR, Nomura said.

He expects China’s yuan to remain under pressure due to continued stock and bond outflows. (Reporting by Nimesh Vora; writing by Sohini Goswami)