MUMBAI, Dec 18 (Reuters) - The Indian rupee this week could build on its gains from Friday's rally and traders will keep an eye on the Bank of Japan's (BOJ) policy outcome, while bonds will track moves in U.S. Treasury yields and oil prices.

The rupee rose sharply on Friday aided by U.S. dollar inflows and touched an intraday high of 82.95 before closing the session at 83 to the dollar.

The dollar index plunged nearly 2% last week on the back of the Federal Reserve dot plot indicating three rate cuts next year and remarks by Fed Chair Powell that policymakers have begun discussing rate cuts.

The rupee is likely to trade with a "positive bias," this week, Arnob Biswas, head of foreign exchange research at SMC Global Securities, said.

The local unit is likely to trade in a stronger range over the coming week with its immediate support near 83.20, Biswas added.

"Next week will be crucial," a foreign exchange trader at a private bank said. If the rupee manages to stay above 83 for a week, then another bout of appreciation "will be on the cards," the trader added.

The BOJ will decide on its policy on Tuesday, after comments by officials discussing the implications of policy normalisation fueled volatility.

Investors will also keep an eye on U.S. core personal consumption expenditure (PCE) inflation data due on Friday.

India's 10-year benchmark bond yield fell 10 basis point last week to 7.1969%, its biggest weekly drop in over seven months.

Traders see the Indian 10-year bond in a 7.12%-7.22% range this week. Investors will watch oil prices and U.S. bond yields for further cues.

Oil rose last week after benefiting from a bullish forecast from the International Energy Agency on demand for next year and a weaker dollar.

U.S. Treasury yields sinked, posting the biggest weekly fall in over a year as bond investors braced for looming rate cuts after the Fed shifted to a dovish stance.

The rate futures market priced in a 78% chance of a Fed cut in March, according to LSEG's FedWatch. The market has also factored in about 140 basis points of easing by the end of next year.

While U.S. rate cut expectation gives the Reserve Bank of India (RBI) comfort in an environment of slowing external growth, RBI will want to keep a watch on the current account deficit, Anitha Rangan, an economist at Equirus Group, said.

"RBI is unlikely to be in a hurry to follow the Fed," but can use liquidity tools to ease rates and normalise the yield curve, she added.

KEY EVENTS: ** Bank of Japan rate decision - Dec. 19, Tuesday ** U.S. Oct housing starts - Dec. 19, Tuesday (7:00 p.m. IST) ** U.S. Dec consumer confidence - Dec. 20, Wednesday (8:30 p.m. IST) ** U.S. Nov existing home sales - Dec. 20, Wednesday ** U.S. Jul-Sept final GDP - Dec. 21, Wednesday (7:00 p.m. IST) (Reuters poll 0.2% on-month) ** U.S. initial weekly jobless claims week to Dec. 11 - Dec. 21, Thursday (7:00 p.m. IST) ** U.S. Nov personal consumption expenditure, core PCE index - Dec. 22, Friday (7:00 p.m. IST) ** U.S. Nov durable goods - Dec. 22, Friday (7:00 p.m. IST) ** U.S. Dec U Mich sentiment - Dec. 22, Friday (8:30 p.m. IST) ** U.S. Nov new home sales - Dec. 22 Friday (8:30 p.m. IST) (Bhakti Tambe and Jaspreet Kalra; Editing by Mrigank Dhaniwala)