The Indian rupee is no longer the darling of emerging market (EM) currencies as policy disputes, the rebound in oil prices and actions by the Reserve Bank of India (RBI) threaten to reverse its strong run earlier this year.
"The Indian rupee (INR) has long been one of our preferred currencies in the broader EM FX context... But local and global challenges are rising against the INR," HSBC said in a report on Tuesday. The bank has now revised its year-end forecast to 66 per dollar, from 63.5 previously.
Stalled reforms and tax fears are among the major obstacles for the currency. This week saw the rupee slide back to levels not seen since mid-2013 against the dollar after two crucial bills - the goods and services tax (GST) and land acquisition act - failed to pass in parliament due to resistance from opposition lawmakers.
Meanwhile, fears that foreign portfolio investors will be included under the minimum alternative tax (MAT) resulted in outflows of 2.1 billion from April 217 to May 8. The MAT is a form of taxation that has only applied to domestic firms in the past. The magnitude of outflows is the largest since 2013's 'taper tantrum' period and marks a stark interruption to India's steady stream of inflows over the past 20 months, HSBC noted.
As a result of such policy battles, other EM currencies could benefit at the INR's expense.
Read MoreIndia to be top economy by 2050
"EM Asia is witnessing a broad-based decline in the FX space so the currencies that stand to benefit are actually outside the region, like Brazil and Russia. Outflows from India could head there just because investors have shunned those markets recently," said Khoon Goh, senior FX strategist, at ANZ.