New Delhi: The rupee faces further risks, even after recovering some lost ground, and may hover around 65 against the dollar by the end of this year, HSBC said.
Risks such as "further equity outflows, higher oil prices, and a lack of policy continuity" remain for the rupee, the London-based banking and financial services company said.
"While we have been cautious towards the INR for some time, we still see continued headwinds for the currency. In this context, we shift our year-end USD-INR forecast higher to 65 from 61 and see extended weakness into next year," HSBC said in a research note.
The rupee settled at 63.48 against the dollar on Friday, gaining for the second consecutive week. The local currency had depreciated to an all-time low of 68.85 on August 28 from 54.99 on December 31.
After the rupee weakened sharply, "policymakers in India stepped in to try to calm the markets, which would have provided some short term relief to INR," HSBC said.
The rupee jumped 425 paise in five straight sessions starting September 4, when Raghuram Rajan took over as RBI Governor and announced steps to rescue the battered financial markets.
HSBC said the rupee can potentially weaken further as a result of "further upside economic data surprises in the US or Eurozone relative to Asia."
Geopolitical risks - particularly in West Asia - are also prevalent for the rupee.
"If tensions rise and push oil prices higher, then the INR would be seen as more vulnerable given the strain that could impact India's trade deficit given the high oil price," HSBC said.
The Prime Minister's Economic Advisory Council Chairman C Rangarajan on Friday said the rupee at the current level is well corrected and stability is returning to the foreign exchange market.
He said as capital flows return and as the current account deficit begins to fall, this tendency will strengthen.