By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI (Reuters) - The Indian rupee, which dropped below 84 against the dollar for the first time ever, is likely to stay under pressure this week, with traders watching the extent of decline the central bank may allow, while bond yields will take cues from U.S. peers.
The rupee fell to its all-time low of 84.07 on Friday, declining 0.1% on the week hurt by elevated oil prices and sustained outflows from local stocks.
Foreign investors have pulled out $7.8 billion from local stocks over the last nine trading sessions and concerns about the Middle East conflict pushed up Brent crude oil prices 10% over October.
Portfolio outflows are likely to continue this week and keep the rupee under pressure but the currency is likely to find support near 84.20, said Dilip Parmar, a foreign exchange research analyst at HDFC Securities.
The Reserve Bank of India's role in guarding against a decline in the local currency will also be in focus. The RBI had intervened via state-run banks on Friday, likely to prevent a sharp fall in the rupee, traders said.
Price-action early next week will offer cues on whether "(USD/INR's) rise above 84 was a one-time break or may have room to run," a trader at a foreign bank said.
The U.S. data calendar is relatively light this week, with retail sales being the only release likely to impact expectations of the Federal Reserve's rate cut path.
Meanwhile, India's 10-year benchmark government bond yield closed at 6.7914% on Friday, down 4 basis points for the week, after rising 7 bps in the previous week.
Traders expect yield to be in a 6.75%-6.85% band this week, with the major focus on the move in U.S. Treasury yields, oil prices as well as local inflation data for cues on interest rates.
"This week would be back to basics like focusing on U.S. yields and oil prices," a trader with a state-run bank said.
Two major developments supported bond market sentiment last week, before local yields gave up some of the decline as the rupee slipped to record low on Friday.
Global index provider FTSE Russell said it would include Indian debt in its emerging market government bond index, and the RBI changed its policy stance to "neutral" last week, opening the door for rate cuts in coming months.
"India's inclusion in FTSE Russell is a welcome move and is expected to bring in around $4-$5 billion of additional foreign flows," said Vidya Iyer, head of fixed income at ICICI Prudential Life Insurance.
KEY EVENTS: ** India September WPI inflation data - Oct. 14, Monday (12:00 pm IST) (Reuters poll: 1.92%)