Indian rupee to extend gains, bond yield seen edging higher

MUMBAI (Reuters) - The Indian rupee will likely extend its gains this week due to persistent dollar inflows, although demand from importers could cap the rise, while government bond yields could edge higher after the hawkish comments from major global central banks.

The rupee gained 0.6% to end at 81.93 last week. The local unit hit 81.8825, its highest since May 11, on Friday on broad weakness in the dollar index as well as likely corporate dollar inflows.

The dollar index, conversely, hit a five-week low after the European Central Bank's hawkish views and rising bets that the Federal Reserve would scale back its aggressive policy stance.

Importers will definitely take advantage if the USD/INR falls to 81.60 levels, and hedge for at least the next two-three months, said Arnob Biswas, FX research head at SMC Global.

It will be difficult to surpass the 81.55-81.60 levels as the Reserve Bank of India will likely jump in to shore up its reserves, Biswas said.

The rupee is expected to trade between 81.50 and 82.25 this week, traders said.

The rising odds of a less hawkish Fed could also help lift the rupee forward premiums off the 2023-lows they hit last week, say traders and analysts.

Meanwhile, the benchmark bond yield ended at 7.0354% on Friday, nearly unchanged after a volatile week.

Traders expect the benchmark yield to move in the 6.98%-7.08% range this week.

Yields fell at the start of last week after data showed India's inflation eased, but rose towards the end of the week following the Fed's projection of further rate hikes this year.

That outlook, for another 50 basis points of rate hikes, came after the RBI said inflation needed to move towards its 4% target and that it would do "whatever is necessary to ensure that long-term inflation expectations remain firmly anchored."

While, like the Fed, the RBI held rates at its last policy meeting, the minutes of that meeting, due on Thursday, could provide the next major directional trigger.

The prospects of renewed Fed rate hikes should cement expectations of a prolonged rate pause in India, ICICI Securities Primary Dealership said in a note.

"We will parse the minutes of the June (RBI) meeting to assess the committee's views on policy stance and reaction function for changes in policy rates."

KEY EVENTS:

o Minutes of RBI's June meeting - June 22, Thursday (5:00 p.m. IST)

o U.S. weekly jobless claims - June 22 (6:00 p.m. IST)

o U.S. May existing home sales - June 22 (7:30 p.m. IST)

(Reporting by Dharamraj Dhutia and Sethuraman NR; Editing by Savio D'Souza)

By Dharamraj Dhutia and Sethuraman N R