WEEKAHEAD-India rupee, bonds to take cues from local and US inflation data

By Dharamraj Dhutia and Jaspreet Kalra

MUMBAI, March 10 (Reuters) - Indian government bonds and the rupee will take cues from local and U.S. inflation data this week, with the currency gaining marginally from the weakness in the dollar, amid concerns over a potential slowdown in the world's largest economy.

The rupee INR=IN closed at 86.8725 against the U.S. dollar on Friday, and posted its best weekly performance in more than two years as the greenback slumped to a four-month low against major peers.

The dollar index has nearly shed all of its gains since U.S. President Donald Trump's election victory, extending losses after data on Friday showed that the country added fewer jobs than expected in February, while the unemployment rate edged up to 4.1%.

Alongside inflation data, trade policy-related developments will also be in focus.

India's import tariffs, among the highest in the world, warrant a reassessment of its "special relationship" with the United States, U.S. Commerce Secretary Howard Lutnick said on Friday.

Lutnick's comments come ahead of Trump's planned reciprocal tariffs from early April on trading partners.

"On USD/INR we still remain a buyer on dips, a view we will revisit only on downside break of 86.50," said Abhishek Goenka, chief executive at FX advisory firm IFA Global.

While a weaker dollar may offer some relief to the rupee, traders expect it to underperform regional peers in the face of persistent portfolio outflows and increased hedging from importers.

Meanwhile, the benchmark 10-year bond yield IN067934G=CC ended at 6.6881% on Friday, down for the week as the Reserve Bank of India surprised the market by announcing a larger-than-expected bond purchase.

However, the fall was capped as the central bank did not include the benchmark security for next week's bond buying.

The yield is expected to move in the 6.65%-6.72% range in the holiday-truncated week, traders said. Indian markets will remain shut on Friday for a local holiday.

Traders will remain vigilant for tariff-related updates from Washington and their impact on global risk sentiment, which has been affected by the ongoing policy shifts. However, the primary focus will be on local and U.S. consumer inflation data, set to be released on Wednesday, as it is expected to influence the rate cut decisions of the respective central banks.

The RBI has begun cutting the policy rate and injecting liquidity while keeping a cautious neutral stance for inflation. But we believe the ongoing disinflation has created room for the RBI to pursue a bolder monetary policy, at least in the near term, ANZ economists Dhiraj Nim and Sanjay Mathur said in a note.

Since the middle of January, the RBI has infused over 4.50 trillion rupees via open market operations, purchases the secondary market, fx swaps and early-April maturity repos.

The foreign brokerage said the RBI has room to cut rates by 25 bps in April and June.

KEY EVENTS:

India

** February CPI inflation - March 12 , Wednesday (4:00 pm IST) (Reuters poll: 4.00%)

** January industrial production - March 12 , Wednesday (4:00 pm IST) (Reuters poll: 3.50%)

U.S.

** February CPI and core CPI inflation - March 12, Wednesday (6:00 p.m. IST) (Reuters poll - 0.3% month-on-month)

** February PPI machine manufacturing - March 13, Thursday (6:00 p.m. IST)

** Initial weekly jobless claims for week to March 3 - March 13, Thursday (6:00 p.m. IST)

** March U Mich sentiment prelim - Feb. 14, Friday (7:30 p.m. IST)

($1 = 86.8670 Indian rupees)