The rupee is likely to see some strengthening and is expected to touch 51 level against the US dollar by December, a report by Bank of America Merrill Lynch has said.
According to the report, higher forex reserves are key for the recovery or rupee and the Indian currency is not likely to "sustainably strengthen" beyond Rs 50 a dollar without the intervention of the Reserve Bank of India.
The rupee today fell to a two-month low of 54.78 against the US dollar.
"We do not expect the INR to sustainably strengthen beyond Rs 50/USD levels unless the RBI recoups the USD 65 billion of forex reserves sold since mid-2008," the report said.
The report further noted that RBI and forex market are today caught in a game in which the worst outcome of a weaker and more volatile INR appears 'logical'.
The Indian unit has been very volatile since August last year and swaying either ways in a rapid manner. It is currently pegged at Rs 54.78 to the US currency.
The INR has depreciated 18.5 per cent - second only to Brazil - since September 2011. In the past two weeks, especially have not been so good for the rupee, which has slipped below the Rs 54 levels.
"In our view, the RBI's situation today is somewhat like the Bank of Korea (BoK) in 2008-09 when the markets hammered the South Korean Won (KRW) questioning the adequacy of forex reserves. Like the BoK, the RBI will have to recoup forex reserves to stabilise the INR, especially as it is not considered politically feasible for Delhi to ask the Fed for a line of credit like Seoul," it said.