The rupee depreciated over the last week as the dollar strengthened on the back of the developments with respect to the tariffs. On Tuesday, it ended at 87.27 versus the dollar. Donald Trump confirmed that the US is moving ahead with the 25 per cent tariffs on Canada and Mexico. 

An additional 10 per cent tariff on China’s exports to the US comes in as well, taking the tariff  to 20 per cent. China has retaliated by slapping a 10 to 15 per cent tariff on agricultural exports from the US to China.

The fear of all out trade war is increasing the demand for dollars. Further actions can send the greenback higher, weighing on the Indian currency.

Over the past week, the foreign flows have been positive albeit a small number. According to NSDL, the net  FPI inflows stood at $117 million. However, the domestic equity market is still under pressure and we may not have seen the end of capital outflows.

That said, a supporting factor is the moderating crude oil prices. It has been on a fall since mid-January. In the last week alone, Brent crude oil price has dropped over 4 per cent. Now that OPEC is set to begin an output hike from April. Lower crude oil prices can bring down the impot bill, a positive for the rupee.

However, the positive impact from a fall in crude oil prices can be limited as the tariffs are going to be on the headlines, which is not good news for emerging market currencies like the rupee. 

The chart also shows that Indian currency’s broader downtrend is intact.

Chart 

The rupee slipped below the support at 87 last week and marked a low of 87.54 on Friday before recovering to the current level. Although this is a bearish signal, there is a chance for the rupee to move up, possibly to 87, before witnessing the next downswing, which can drag it to 88 and lower. 

In case the local currency moves above 87, it can extend the rally to 86.50, which is a strong resistance.

The dollar index has seen a decline in the last two sessions after seeing a sharp rally in the preceding few days. While the index might soften further from the current level of 106.30 to 105.50, the chances are high for it to resume the uptrend. It can rise to 108.50-109 price band once the upswing begins.

Outlook 

As it stands, the rupee can recoup some of its losses in the next two or three sessions and touch 87. But thereafter, it is likely to resume the downtrend to hit 88 in the coming weeks.