WEEKAHEAD-Little relief ahead for rupee; bonds to track RBI, index inclusion

By Dharamraj Dhutia and Jaspreet Kalra

MUMBAI, Jan 12 (Reuters) - The Indian rupee is likely to remain under pressure this week as traders gauge how sternly the Reserve Bank of India will defend the currency, with geopolitical risks adding to the headwinds confronting the South Asian currency.

Meanwhile, the bond market will track RBI liquidity actions and developments around the possible inclusion of Indian bonds in Bloomberg's Global Aggregate Index later this year.

The rupee INR=IN closed at 90.1625 per dollar on Friday, little changed week-on-week.

Growing supply worries linked to intensifying protests in oil-producing Iran and an escalation of attacks in Russia's war in Ukraine pushed up oil prices by about 4%.

Over the weekend, Tehran threatened on Sunday to retaliate against Israel and U.S. military bases in the event of U.S. strikes on Iran. U.S. President Donald Trump has repeatedly threatened to intervene in recent days.

The developments could add to the pressure on the rupee, leaving traders focused on how sternly the central bank acts to defend the currency.

India's foreign exchange reserves INRFXR=ECI fell $9.8 billion in the week ended January 2 to $686.8 billion, the steepest weekly drop in more than a year.

"The RBI has been intervening in the 90.20-90.30 zone but may step aside and allow the range to adjust higher (for USD/INR) if buying pressure continues," FX advisory firm IFA Global said in a note.

BONDS

The 10-year benchmark 6.48% 2035 yield IN064835G=CC settled at 6.6401% on Friday, up for a second consecutive week amid supply worries.

Traders expect the yield to move in a 6.60%–6.70% range, with continued attention on the overall demand-supply scenario as well as the central bank's liquidity action.

Indian states will borrow 5 trillion rupees ($55.47 billion) in January-March, while the federal government plans to borrow more than 3 trillion rupees, the highest aggregate quarterly debt supply.

This is already putting pressure on yields, leading to a widening of the spread between states and the federal government.

"Q4 typically sees a higher supply of state debt, and hence we expect the spreads to remain at their current (elevated) levels in the coming months," Sachin Bajaj, executive vice president & chief investment officer, at Axis Max Life Insurance.

This expectation is primarily driven by the higher supply, and in addition, rise in long-dated state bonds as compared to past years, he added.

The RBI will buy bonds worth 500 billion rupees on Monday, followed by a similar purchase on January 22. Traders will watch out for the notes it includes for the next operation.

KEY EVENTS:

India

December CPI inflation - January 12, Monday (4:00 p.m. IST)(Reuters poll 1.50%)

December WPI inflation - January 14, Tuesday (12:00 p.m. IST)(Reuters poll 0.30%)

U.S.

December consumer price inflation - January 13, Tuesday (7:00 p.m. IST) (Reuters poll: 2.7%)

October new home sales - units - January 13, Tuesday (8:30 p.m. IST)

October PPI machine manufacturing - January 14, Wednesday (7:00 p.m. IST)

November retail sales - January 14, Wednesday (7:00 p.m. IST)

December existing home sales - January 14, Wednesday (8:30 p.m. IST)

November import prices - January 15, Thursday (6:30 p.m. IST)

Initial weekly jobless claims for week to January 10 - January 15, Thursday (7:00 p.m. IST)

January Philly Fed Business index - January 15, Thursday(7:00 p.m. IST)

December industrial production - January 16, Friday (7:45 p.m. IST)

($1 = 90.1320 Indian rupees)