Rupee to hover near 81/USD, bond yields await RBI decision

By Anushka Trivedi and Dharamraj Dhutia

MUMBAI (Reuters) - The Indian rupee is expected to stay on the weaker side of 81 per dollar, while bond yields will remain rangebound until the Reserve Bank of India's (RBI) monetary policy decision on Wednesday when yet another interest rate hike is widely expected.

The rupee ended up 0.45% last week at 81.3175 per dollar but underperformed its Asian peers due to strong demand for the greenback from corporates.

The dollar index had tumbled 1.4% last week after expectations of smaller rate hikes were reaffirmed, with U.S. Treasury yields also plunging.

India's benchmark 10-year bond yield declined 8 basis points (bps) to 7.2215% in tandem. Its movement this week will be highly dependent on the central bank's commentary.

Yields may trend lower initially on anticipation of some dovish signals from the RBI on Wednesday, said a fixed-income trader at a private bank, with a break of the 7.15%-level likely if a subsequent pause is suggested.

"But the lower range may be difficult to sustain," the trader added, expecting bond yields to stay in the 7.15%-7.30% band for the week.

In the currency markets, a 35-bps rate increase by the RBI has largely been priced in, especially after the Fed signalled a slowdown in the pace of its hikes. That has taken some pressure off the rupee, said a dealer with a private bank.

However, dollar buying by corporates and the RBI at the 80-per-dollar handle should see the currency staying between 81-81.50 during the week.

The central bank is expected to deliver its fifth straight hike to bring the repo rate to 6.25%, a Reuters poll found, as it continues to battle inflation, which last came in at 6.77% in October.

"While inflation has begun to moderate and signs of slower growth are visible, neither trend is sufficient to shift the needle towards a pause," Barclays economists wrote in a note, adding that there was a possibility of a split vote.

In addition, given that the policy rate is now closer to neutral, this should also be the time for the MPC to shift its stance to 'neutral', they added.

KEY EVENTS:

* China Nov Caixin Services PMI (Dec 5, 7:15 am IST) * India Nov S&P Global Services PMI (Dec 5, 10:30 am IST) * China Nov trade data (Dec 7, 8:30 am IST) * RBI MPC rate decision (Dec 7, 10:00 am IST) * India Nov trade data (Dec 1-8)

(Reporting by Anushka Trivedi in Mumbai; Editing by Janane Venkatraman)