MUMBAI, March 18 (Reuters) - The rupee is likely to kick off the week slightly on the back foot, while bond yields may move higher as investors keep a close eye on monetary policy decisions from the U.S. Federal Reserve and Bank of Japan.
The rupee closed weaker at 82.8775 against the U.S. dollar on Friday and notched its first weekly decline since mid-February, pressured by a surge in U.S. bond yields after data signaled that inflation in the world's largest economy may prove to be stubborn.
Most Asian currencies were down week-on-week, while the dollar index notched its first weekly gain in four, boosted by further moderation in bets that the U.S. Federal Reserve may cut policy rates in June.
While the Fed is widely expected to keep rates steady at its March 19-20 meeting, investors will take their cues from Chair Powell's remarks and the Fed's dot-plot on the future trajectory of interest rates.
The rupee may fall "a tad below 83 this week" and the pressure could magnify if hopes of Fed rate cuts ebb further, said Gaurang Somaiya, a foreign exchange research analyst at Motilal Oswal Financial Services.
Traders anticipate the currency to trade in 82.70 - 83.10 range this week.
Also of interest is the Bank of Japan's policy decision on Tuesday, amid growing hopes that the central bank is looking to exit its eight-year-long policy of negative interest rates -- an outcome expected by 35% of economists in a Reuters poll.
Meanwhile, the 10-year Indian government bond yield ended at 7.0644% on Friday, gaining 3 basis points in the week after dipping 8 bps in the previous four weeks.
Traders expect the yield to move in a 7.00%-7.10% range this week.
Their rise last week tracked the upward swing in Treasury yields on concerns that rate cuts would start in June. Yields could react more if the updated dot plot shows only two rate cuts for 2024, traders said.
Still, any major rise in yields will be capped as demand-supply dynamics remain favourable and as the continuous foreign inflows into government bonds work in favour of local debt.
Foreign investors have already bought bonds worth nearly 100 billion rupees ($1.21 billion) on a net basis in March, adding to aggregate net purchase of more than 375 billion rupees in the first two months of 2024, data showed.
India's stable exchange rate has been a key factor behind the foreign flows and such investments are expected to persist as the South Asian country's debt gets added to global indexes.
Foreign portfolio investors have raised their holdings of Indian government bonds by nearly 50% since the index inclusion news less than six months back.
Wontae Kim, a research analyst at Western Asset Management said, the yield curve is getting extremely flat, and the fund house remains overweight in the belly to the long end of the curve.
"The supply dynamics look really good in India. It seems to be a lot less than what we expected and the fiscal deficit path surprised, in a good way. Those are all positive drivers for bonds and the government's trajectory for its deficit for the next two years is very reasonable considering the growth rate of India."
KEY EVENTS:
** Bank of Japan rate decision - March 19, Tuesday (Reuters poll: No change expected)
** U.S. Feb housing starts - March 19, Tuesday (6:00 p.m. IST)
** U.S. Fed Federal Reserve policy decision - March 20, Wednesday (11:30 p.m. IST)
** Bank of England rate decision - March 21, Thursday (5:30 p.m. IST)(Reuters poll: No change expected)
** U.S. initial weekly jobless claims week to March 11 - March 21, Thursday (6:00 p.m. IST)
** U.S. March Philly Fed Business Index - March 21, Thursday (6:00 p.m. IST)
** U.S. S&P Global, manufacturing, services and composite flash PMI - March 21, Thursday (7:15 p.m. IST)
** U.S. Feb existing home sales - March 21, Thursday (7:30 p.m. IST) ($1 = 82.8606 Indian rupees) (Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Savio D'Souza)
