Why the rupee storm isn’t over yet

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The Indian rupee is managing to catch a break from a precipitous sell-off that's dogged the currency in the past month, rebounding 4.4 percent against the U.S. dollar since plummeting to a fresh record low of near 69 last Thursday.

But foreign exchange strategists are skeptical the turnaround is sustainable, citing domestic economic fragilities, the risk of further capital outflows and the prospect of higher U.S. yields.

(Read more: Why the rupee may not be headed to 70)

"It's more of a short-term bounce; the measures last week announced by the RBI [Reserve Bank of India] have helped the rupee, resulting in less panic dollar buying. The delay in military action in Syria is also helping global sentiment. But the rupee still remains vulnerable," Mitul Kotecha, head, Foreign Exchange Strategy at Credit Agricole told CNBC on Monday.

Last Wednesday, the RBI said it was providing a special window with immediate effect to sell U.S. dollars to three state-run oil companies – a measure aimed at reducing a major source of dollar demand from the spot market.

(Read more: India swamped by a wave of growth downgrades)

"The RBI is just changing the mechanism for dollar buying, it doesn't alter demand. It doesn't change the inherent issues weighing upon the rupee in the first place," Kotecha said. "The risk is to move back to recent highs near 70 – at which point we will likely see more measures announced by the RBI."

The currency edged down 0.2 percent against the greenback to trade around the 65.80 level Monday, a relatively mild move after suffering its biggest monthly fall in at least 18 years in August.

Rahul Bajaj, chairman of Indian conglomerate Bajaj Group agreed the central bank's efforts provide merely a short-term fix.

"The measures can only help in the short term, ultimately the rupee level vis a vis the dollar, is dependent on our current account deficit," Bajaj told CNBC on Friday.

(Read more: Calls get louder for India to free up currency)

India's central bank was not alone in its efforts to stem losses in its currency last week. Bank Indonesia (BI) raised its main policy rate by 50 basis points to 7 percent in a bid to stabilize the wilting rupiah.

"These measures by the RBI and BI have without a doubt helped to shore up the rupiah and the rupee from pretty beaten up levels; but good fortune also played a part. Just after these policy measures late last week, softer U.S. data triggered some unwind of QE taper bets," said Vishnu Varathan, senior economist, Mizuho Bank.

(Read more: Is the rupee 'out of control'?)

"So it is difficult to isolate the efficacy of those policy moves, and crucially premature in any case to assume that reversals of sell-off will be durable. In our view, more follow-through policy action is required to engineer a sustained turnaround in investor sentiments. But above all QE taper will set the tone," said Varathan.

—By CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H