Rising crude oil prices along with widening trade deficit has elevated the depreciation risk level for the Indian rupee during the upcoming week.
Accordingly, other factors like failure of Brexit talks as well as changes in US Fed's stand might the downside risks.
"We expect the rupee to trade strong till the time equity flows are robust," said Sajal Gupta, Head, Forex and Rates, Edelweiss Securities.
Last week, foreign institutional investors pumped in over Rs 15,000 crore into the equity markets.
The inflow not just lifted equities but also swelled the Reserve Bank's forex reserves.
"But, risks of depreciation are rising with crude oil prices rising above $50 a barrel and rising monthly trade deficit," Gupta said.
"Brexit talks failure can also lead to some volatility in markets."
The crude oil prices have been gaining during the week in anticipation of the FDA's potential approval of Pfizer's vaccine, as Asia's economic recovery is making Chinese and Indian refiners acquire more oil, and on rising geopolitical risks in the Middle East after Iraq had two wells hit.
Besides, the preliminary trade data on November showed that India became a net importer in November 2020, with a trade deficit of $9.96 billion.
"The dollar has been falling as we expected and now has reached near term support," said Devarsh Vakil, Deputy Head of Research at HDFC Securities.
"We expect the rupee-dollar to correct after four weeks of appreciation and head towards 74 mark next week. The 73.4 mark remains strong support for the pair."
According to Gaurang Somaiya, Forex and Bullion Analyst, Motilal Oswal Financial Services, said: "For the week, focus will be on inflation number; expectation is that the number could rise and that would further trim expectation of rate cut by the RBI."
"For the week, we expect the USD-INR (Spot) to trade sideways to positive and quote in the range of 73.40 and 74.20."
Next week, the National Statistics Office is slated to release the macro-economic data points of Consumer Price Index on December 14.
It will also release the Wholesale Price Index on Monday.
Additionally, Rahul Gupta, Head of Research-Currency at Emkay Global Financial Services, said: "Going ahead, the expectations of an additional US fiscal stimulus package along with the backdrop of more promising coronavirus vaccine development news will continue to support the risk-on environment."
"While the dollar bulls will be on the sidelines ahead of next week's Fed policy. We expect the Fed to maintain a status quo however update the growth and inflation forecast along with a dovish stance."
"But still there exist Brexit worries which may activate some dollar uptick. So unless the USD-INR spot doesn't consistently trade above 74, the trading range would continue to be 73.25-74. If 74 breaks then price can surge towards 74.20 zone."