Rupee seeks respite in truncated week, bond yields seen up

MUMBAI (Reuters) - The Indian rupee is expected to find some relief in a holiday-shortened trading week but will hover near its record lows, while government bond yields are likely to stay elevated tracking debt markets across developed economies, traders and analysts said.

The rupee plumbed fresh record lows of 83.29 per dollar on Thursday, with the Reserve Bank of India intervening to rein in losses, as growing fears of aggressive monetary tightening by the U.S. Federal Reserve sent the local unit into a tailspin.

It lost 0.4% in a turbulent week to close at 82.6750, and is expected to move in a range of 82.60-83.20 next week amid lack of inflows due to market holidays on Monday and Wednesday, traders said.

The benchmark Indian government bond yield ended at 7.5121% on Friday, gaining four basis points (bps) over the week, having risen an aggregate 30 bps in the last five weeks.

"A lot depends on if there are hawkish comments from more Fed officials after remarks over the last couple of days sent the U.S. 10-year yield to its highest since 2008," said Ritesh Agarwal, head of treasury at CTBC Bank.

For Indian bond markets, the yield range had shifted upwards to 7.47%-7.57% from the previous 7.40%-7.50% band, with a likelihood of testing the top end of the new range, a trader with a private bank noted.

However, "chances of the yield touching 7.60% are lower, as we will not have bond auction from the centre (federal government)in the week," the trader said.

With lack of any major triggers, bond market participants will continue to monitor movement in the local currency.

Even though next week looks subdued for the rupee, traders expect continued pressure from the dollar index's sustained rise. Fragile yen, weak sterling and spiking U.S. yields are the near term factors that will likely send the greenback soaring.

In broader markets, the key events to look out for are the Bank of Japan meeting and third-quarter U.S. gross domestic product data, both due on Thursday, with the latter likely to show an increase of 2%, keeping the Fed on its rate hiking path.

Moreover, market will be keen to know who will be the UK's next prime minister and what measures the Bank of England will take "because the UK market has not experienced this kind of volatility in a long time," CTBC Bank's Agarwal said.

(Reporting by Anushka Trivedi in Mumbai; Editing by Dhanya Ann Thoppil)

By Anushka Trivedi and Dharamraj Dhutia