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India rupee, bonds set to rise after state poll outcome

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By Dharamraj Dhutia and Nimesh Vora

MUMBAI, Dec 4 (Reuters) -The Indian rupee and government bond prices will likely rise at the start of the week, buoyed by favourable state election results for the India's ruling party as well as after commentary from U.S. Federal Reserve Chair Jerome Powell which signalled optimism about progress in combating inflation.

Through the week, traders will track U.S. economic data to gauge the possibility of the Federal Reserve cutting interest rates next year, as they await the Reserve Bank of India's (RBI) policy decision.

Prime Minister Narendra Modi's Bhartiya Janata Party looks likely to form governments in three of the five Indian states that had recently gone to the polls.

India's main opposition Congress party was pegged to win two assembly elections and was in close contest with the ruling party in two heartland states, TV exit polls had showed.

"The state election results are likely to be welcomed by investors and asset markets as they remove political uncertainty, revive policy/reform optimism and reduce fears of large-scale fiscal populism going into the national elections," Citigroup said in a note on Monday.
The rupee INR=IN ended last Friday at 83.2875, nearly unchanged week-on-week.

The RBI is on Friday expected to stand pat on rates and maintain a hawkish stance, amid upbeat growth and upside risks to near-term inflation on account of food prices.

The central bank may flag risks to inflation from a potential recurrence of food price shocks and its impact, while drawing comfort from a moderation in core inflation, Barclays said in a note.

While the RBI policy is "always important", it's "difficult to think it will have much impact" on rupee, a FX trader at a bank said.

"When a big down move on the dollar did not move rupee, you can't expect a policy in which the rate decision is a certainty to be of any consequence."

U.S. ISM services data is due on Tuesday, followed by a series of data points that will provide cues on how the U.S. labour market is faring. The most important of it, the monthly non-farm payrolls print, is due on Friday.

The data will be scrutinized in the backdrop of investors having priced in more than four 25 basis points (bps) of rate cuts by the Fed in 2024.

India's 10-year benchmark bond yield IN071833G=CC ended higher last week at 7.2899%, after rising five basis points in the prior week.

Traders see the bond yield in a 7.20%-7.30% range this week till the RBI policy decision, with focus on further guidance from the central bank and commentary on domestic bank liquidity.

The RBI is likely to remain hawkish in its monetary policy and will likely increase FY24 GDP forecast to 6.8% from 6.5% earlier, while keeping inflation forecast unchanged at 5.4%, Deutsche Bank said.

"RBI will likely keep repo rate and stance unchanged, persist with tight liquidity and ensure that short-term rates remain around 6.85-6.90%, resulting in an "effective rate hike", the foreign bank said in a note.

Traders will also continue to monitor U.S. Treasury yields after the 10-year US10YT=RR dropped over 50 bps in November, its biggest monthly drop in over 12 years.

Markets would also be glued to any update from the RBI on its plans to sell bonds, as banking system liquidity position is set to improve during the week amid government's month-end spending.

In the October monetary policy, RBI had said it plans to sell bonds via auction to absorb liquidity, which had sent yield higher, and reduced trading activity for some days.


** U.S. Oct factory orders - Dec. 4, Monday (8:30 p.m. IST)

** India Nov S&P Global Services PMI - Dec. 5, Tuesday (10:30 a.m. IST)

** U.S. Nov S&P Global composite and services PMI - Dec. 5, Tuesday (8:15 p.m. IST)

** U.S. Nov ISM non-manufacturing PMI - Dec. 5, Tuesday (8:30 p.m. IST)

** U.S. Oct international trade - Dec. 6, Wednesday (7:00 p.m.)

** U.S. initial weekly jobless claims week to Nov. 27 - Dec. 7, Thursday (6:00 p.m. IST)

** India policy rate decision - Dec. 8, Friday (10:00 a.m. IST) (rates expected to remain unchanged)

** U.S. Nov non-farm payrolls and unemployment rate - Dec. 8, Friday (7:00 p.m. IST)

** U.S. Dec U Mich sentiment prelim - Dec. 8, Friday (8:30 p.m. IST)

Reporting by Dharamraj Dhutia and Nimesh Vora; Editing by Varun H K and Mrigank Dhaniwala


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