Oil prices will drive the Indian rupee and government bonds this week amid Middle East uncertainty, while traders also watch July inflation data from India and the U.S. for rate cues.
The rupee closed at 95.2075 per dollar on Friday, up about 0.2% week-on-week.
Data on Friday showed the U.S. economy unexpectedly lost jobs in July, leading traders to scale back Fed rate-hike bets, which pulled down Treasury yields and the dollar.
Meanwhile, Iran said on Sunday a deal on new shipping lanes in the Strait of Hormuz is nearly finalized, but reiterated the key energy route will reopen only once the U.S. meets other conditions.
Volatility in energy prices amid Middle East uncertainty has kept traders focused on inflation trends, with both the U.S. and India set to report consumer inflation data this week.
The Reserve Bank of India had kept policy rates unchanged last week. Analysts at ANZ reckon that the central bank will deliver at least two 25-basis-point rate hikes starting December 2026.
"Rising inflation expectations, elevated global commodity prices and resilient domestic demand suggest underlying inflation could build faster than the RBI currently anticipates," ANZ said.
BONDS
Government bonds are likely to remain in a narrow range after logging some recovery in the previous week, with market participants awaiting domestic inflation data.
Bond yields posted their first fall in five weeks, tracking a decline in oil prices and a dovish tilt to the RBI policy.
The 10-year benchmark yield ended at 6.7651% on Friday, 7 bps lower for the week, following a 12 bps rise in the preceding four weeks.
Traders expect the benchmark yield to move in the 6.74%-6.82% range this week.
The RBI slashed its forecast for core inflation by 40 bps to 4.3% for the current fiscal, while moderately reducing headline inflation projection by 10 bps to 5%.
Governor Sanjay Malhotra also said that the central bank will provide sufficient liquidity in the banking system.
"The key signal was RBI's willingness to look through temporary supply-side inflation shocks unless they become broad-based and persistent," said Vishal Kaushal, head of global markets, India, Crédit Agricole CIB.
"Geopolitical developments in West Asia and their impact on commodity prices and global yields are likely to largely determine the trajectory of bond yields in the near term." KEY INDICATORS
India
** July retail inflation - August 12, Wednesday (4:00 p.m. IST) (Reuters poll: 4.50%)
** July wholesale inflation - August 14, Friday (12:00 p.m. IST) (Reuters poll: 9.95%) U.S. ** July existing home sales - August 11, Tuesday (6:00 p.m. IST) ** July consumer price, core inflation - August 12, Wednesday (6:00 p.m. IST)(Reuters poll: 3.4%)
** July PPI machine manufacturing - August 13, Thursday (6:00 p.m. IST)
** Initial weekly jobless claims for the week to August 8 - August 13, Thursday (6:00 p.m. IST)
** July retail sales - August 14, Friday (6:00 p.m. IST) ** August U-Mich sentiment prelim - August 14, Friday (7:30 p.m. IST)
