The rupee notched big gains for the fifth straight trading session on the back of a strong stock market rally fuelled by foreign investors now upbeat on Indian assets.
The rupee breached another psychological level of 52/$ on Thursday to close at 51.74/$, a new over five month high. The government's series of measures over the last one month to boost economic growth and investment sentiment have indeed lifted market mood, dealers said.
The rupee's smart rally in the last one week has sent analysts who predicted a more cautious outcome running back to their calculations and revising their forecasts for the currency.
Standard Chartered Bank has revised its December-end rupee forecast to 53/$ from 54.50/$ earlier.
HSBC had already revised its forecast on the rupee to 52/$ last month from around 56/$ earlier. It maintains this forecast now.
Nevertheless, the revised forecasts also suggest a further weakening of the currency.
In our view, the complex political and weak fundamental backdrop makes rupee gains from here vulnerable to a swift reversal into year-end, Standard Chartered Bank said in a report. The bank expects the rupee to weaken further to 54/$ by end of 2013.
HSBC expects the rupee to trade around 52/$ levels until December, according to Leif Eskesen, chief economist for India and ASEAN.
But there is more scope for it to strengthen even further. We think with more traction in reforms and the global situation stabilising, by the end of 2013, the rupee could rise to 49/$, said Eskesen.
The more sanguine forecasts which includes Bank of America-Merrill Lynch, Goldman Sachs and CRISIL are sticking to their guns.
Goldman Sachs expects the rupee to appreciate further to 51/$ citing further improvement on the current account. Crisil had predicted the rupee to appreciate to 50/$ by December.
But analysts continue to warn against fundamentals which are still weak and the threat of the US fiscal cliff during December that would entail volatility.
Towards the end of 2012, tax laws that gave relief on payments will expire and at the same time spending cuts will take effect.
Bank of America-Merrill Lynch says that the US fiscal cliff could cloud the impact of quantitative easing by the Federal Reserve and thereby strengthen the dollar.
While the government's reform spree that is expected to continue may well send the currency further upwards, looming global headwinds could upset the rally.