The Indian rupee's outlook remains weak and any rally in the currency following JPMorgan's index inclusion should be used to build long USD/INR positions, economists at Nomura said in a note, raising the conviction level on its long USD/INR positions to the maximum.

The rupee had climbed to near 82.80 against the U.S. dollar following JPMorgan's decision to include India in its flagship emerging market index, but it could not sustain the rally and was currently slightly weaker than what it was before the inclusion at 83.1125.

Nomura said actual inflows from passive funds are unlikely until around June 28, 2024, when the bonds will be included, and active fund houses will need to be mindful of their tracking error limits.

Actual inflows may be smaller with some real money managers that they tracked already invested about 2%-3% on average, the brokerage said.

India's possible worsening of the current account deficit and risk of equity outflows were other reasons cited by Nomura for the bearish outlook on the rupee, along with a higher dollar and a weaker Chinese currency.

"India's current account could come under further pressure from a widening trade deficit," Nomura said in the note.

The recent ban on rice exports and rise in oil prices could widen India's trade deficit by around $17 billion on an annualised basis, it added.

Nomura called for a higher dollar, highlighting the September projections of the U.S. Federal Reserve that indicated a continuation of the theme that rates were likely to remain high for longer.

Higher USD/CNH is likely to feed through to higher USD/Asia, including USD/INR, Nomura said.

It expected the Chinese yuan to remain under pressure on continued equity and bond outflows. (Reporting by Nimesh Vora; Editing by Sohini Goswami)