Rupee, bonds eye oil prices and inflation data this week

Oil prices and key inflation readings from India and the United States are set to drive the Indian rupee and government bonds this week, as markets weigh Middle East supply risks against shifting rate expectations.

The rupee closed at 95.2075 per dollar on Friday, up about 0.2% on the week. A surprise fall in US July payrolls prompted traders to trim Federal Reserve rate-hike bets, pulling down Treasury yields and the dollar.

Meanwhile, Iran said on Sunday that a deal on new shipping lanes in the Strait of Hormuz is nearly finalised, but reiterated that the key energy route will reopen only once the US meets other conditions. The uncertainty has kept energy prices volatile, keeping inflation trends in focus.

India's July consumer price index (CPI) data, due Wednesday, is expected to show inflation at 4.50%, up from 4.38% in June, according to a poll of 40 economists. The Reserve Bank of India kept policy rates unchanged last week. ANZ analysts expect at least two 25-basis-point rate hikes starting December 2026, citing rising inflation expectations, elevated commodity prices and resilient domestic demand.

Government bonds are likely to stay in a narrow range after recovering last week. The 10-year benchmark yield ended at 6.7651% on Friday, down 7 basis points for the week, following a 12 bps rise in the preceding four weeks. Traders expect the yield to move in the 6.74%-6.82% band this week.

The RBI cut its core inflation forecast by 40 bps to 4.3% for the current fiscal and trimmed its headline projection by 10 bps to 5%. Governor Sanjay Malhotra said the central bank will provide sufficient liquidity in the banking system.

"The key signal was RBI's willingness to look through temporary supply-side inflation shocks unless they become broad-based and persistent," said Vishal Kaushal, head of global markets, India, at Crédit Agricole CIB. "Geopolitical developments in West Asia and their impact on commodity prices and global yields are likely to largely determine the trajectory of bond yields in the near term."

Key data this week include India's July wholesale inflation on Friday (poll: 9.95%) and US July CPI on Wednesday (poll: 3.4%). US retail sales, jobless claims and consumer sentiment are also due.