MUMBAI, Oct 9 (Reuters) - The Indian rupee and government bonds are likely to take cues from oil prices and inflation readings in the United States and at home, with bond traders also anticipating additional details on the central bank's surprise plan to conduct open market sales.
Oil prices surged on Monday after military clashes between Israeli and Hamas forces over the weekend increased the political uncertainty across the Middle East. Brent crude climbed 4.4% to $88.30 per barrel.
Geopolitical risks are likely to contribute to the dollar's move higher and push investors to seek safer assets, said Arnob Biswas, head of FX research at SMC Global Securities.
There "was a potential" that the rupee could weaken below 83.30 (the record low), he said.
The rupee last week was held in a narrow range amid likely intervention from the central bank. It closed at 83.2450 on Friday.
Meanwhile, a jobs report in the U.S. on Friday showed that the economy added 336,000 jobs against 170,000 expected. The 10-year U.S. Treasury yield surged to 4.8870% after the data was released before pulling back below 4.80%.
The jobs report did not alter expectations around the U.S. Federal Reserve.
"We would still argue that monetary policy is restrictive enough and we don't think that the Fed will hike again," ING Bank said in a note.
Meanwhile, bond yields had jumped on Friday after the Reserve Bank of India (RBI) kept rates unchanged, but signalled it would keep rates high and liquidity tight to bring inflation closer to its target of 4%.
The central bank, however, said it will conduct open market sales of bonds through auctions to sop up any excess funds in the financial system, leading to a sharp spike in yields across the curve.
"The potential OMO announcement has now introduced a local risk. Given that this was unanticipated and remains uncertain in contours, the reaction for the time being has been large from market participants," said Suyash Choudhary, head of fixed income at Bandhan AMC.
IDFC First Bank expects the benchmark bond yield to hit 7.45% in the near term when the central bank announces the actual OMO auction.
The benchmark 7.18% 2033 bond yield ended at 7.3412% on Friday, up 13 basis points for the week, the biggest such move in 17 months and after rising 6 bps in the preceding week.
The yield posted its biggest single-session rise in 14 months, while market participants expect it to be in a wide 7.26%-7.40% range, with a major focus on the developments on the open market sales from the RBI.
Market participants will also keep an eye on movement in oil prices after the conflict between Israel and Hamas fighters started over the weekend.
KEY EVENTS:
** U.S. Sept PPI Machine manufacturing - Oct. 11, Wednesday (6:00 p.m. IST)
** India August industrial output - Oct. 12, Thursday (5:30 p.m. IST)
** India September CPI inflation - Oct. 12, Thursday (5:30 p.m. IST)
** U.S. September CPI - Oct. 12, Thursday (6:00 p.m. IST)
** U.S. initial weekly jobless claims week to Oct. 2 - Oct. 12, Thursday (6:00 p.m. IST)
** India September WPI inflation - Oct. 13, Friday (12:00 p.m. IST)
** U.S. September import prices - Oct. 13, Friday (6:00 p.m. IST)
(Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Nivedita Bhattacharjee and Eileen Soreng)
