Another concern for the rupee is the higher than expected US inflation number which resulted in a sell-off in US bonds, it said. Though not of immediate consequence to India, a sharp correction in the Dow could have an adverse impact on Asian markets and hence on India (which is still clubbed to an extent with the rest of Asia), cautioned the report. "The external situation needs to be watched closely," it said.

"At the current stage, there does not seem to be any more positive news which could trigger a fresh rally in forwards. On the other hand, we might see some RBI induced volatility in the spot rate (of the dollar) just to keep importers from getting too complacent andthis in turn would result in higher forward premiums," pointed out.

For these reasons, though there is no apparent cause for concern in the immediate term, this is a good opportunity to take some profit on forwards which have rallied strongly and re-enter at more attractive levels at a later stage, noted the report.

Dollar inflows seen since October are expected to continue, though the pace may slow down somewhat. Domestic factors are likely to remain favourable which will keep sentiment towards the rupee firm, predict the JP Morgan newsletter.

The foreign inflows have been quite broadbased with external commercial borrowings (ECBs) contributing $2.01 billion. There has been a foreign direct investment (FDI) nearly $900 million and another $900 million through portfolio investments (including GDRs).

It is unlikely that all these would turn around at the same time so the threat from reversal of capital flows is limited.

The increasad weightage for Indian stocks and the improvement in sentimenttowards South-east Asia have seen encouraging FII flows into India over the past few weeks.

Further, the pipeline of ECB approvals is quite strong and this should ensure steady inflows from this source over the next couple of months, the report noted.