MUMBAI, Aug 5 (Reuters) - The Indian rupee and government bond yields this week will gauge heightened concerns of an economic slowdown in the United States alongside the Reserve Bank of India's (RBI) monetary policy decision.
The rupee declined to an all-time low of 83.7525 against the U.S. dollar on Friday, before closing at 83.75.
The RBI's intervention capped sharp losses amid weak risk appetite and a global sell-off in equities prompted by concerns about a souring U.S. economy.
Overseas investors sold nearly $400 million of local stocks on a net basis on Friday, per provisional exchange data.
The rupee is expected to "depreciate steadily in the near-term," with weakness in the dollar leading to only short-lived upticks, a senior trader at a state-run bank said.
Expectations that the central bank won't allow sharp movement on either side should keep the currency in an 83.60-83.90 range this week, the trader added.
Weaker than expected U.S. jobs data on Friday magnified concerns about the U.S. economy, raising investor expectations of aggressive rate cuts by the Federal Reserve.
"Our reliable recession pricing indicator from the Fed funds market has now moved into recession zone," Societe Generale said in a note.
"This pricing looks very sharp and has been caused by many factors moving together -- weak economic data, weak earnings and geopolitical uncertainty over the weekend."
The dollar index slid 1% to 103.2 on Friday while the 10-year U.S. bond yield fell to a 2024 low of 3.80% and the two-year yield plunged to 3.87%.
Meanwhile, the Indian 10-year government bond yield ended at 6.8945% on Friday, its lowest since March 2022 and down 5 basis points last week after easing 3 bps in the previous week.
Traders expect the benchmark yield to move in the range of 6.85% to 6.95% until the RBI's policy decision on Thursday.
While a rate cut is unlikely, the RBI's guidance is key, especially as over three Fed rate cuts are priced in for this year.
The RBI will keep the policy rate unchanged, with a 4:2 vote in favour, sound relatively optimistic on growth and acknowledge the decline in core inflation, but it will continue to reiterate commitment to its 4% headline inflation target, Goldman Sachs said.
Meanwhile, in a major development last week, the central bank reimposed curbs for foreign investment in new 14-year and 30-year bonds -- a flip-flop in policy that has irked foreign investors and could force them to redraw investment strategies.
Given the imminent start of a rate-cut cycle in both the U.S. and India, it is unlikely passive investors will completely pull out, said Deepak Bhayana, managing director and head of global markets, India at MUFG Bank.
The next major triggers will be the monsoons' progress and the RBI's stance on rates and policy, he added.
KEY EVENTS:
** HSBC July services PMI - Aug. 5, Monday (10:30 a.m. IST)
** U.S. July S&P Global services and composite PMI - Aug. 5, Monday (7:15 p.m. IST)
** U.S. July ISM non-manufacturing PMI - Aug. 5, Monday (7:30 p.m. IST)
** U.S. June international trade - Aug. 6, Tuesday
** India policy rate decision - Aug. 8, Thursday (10:00 a.m. IST) (Reuters poll: rates to remain unchanged)
** U.S. initial weekly jobless claims week to July 29 - Aug. 8, Thursday (7:00 p.m. IST) ($1 = 83.7940 Indian rupees) (Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Savio D'Souza)
