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By Dharamraj Dhutia and Jaspreet Kalra
MUMBAI (Reuters) - The Indian rupee will react to the announcement of reciprocal tariffs from the United States this week, with investors looking to gauge how the levies may impact global trade and growth prospects, while government bond yields are expected to decline.
The rupee closed at 85.47 against the U.S. dollar on Friday, rallying 2.3% in March on the back of a pickup in dollar inflows spurred by seasonal corporate activity and foreign portfolio investors.
While the currency outperformed regional peers last month and logged its highest monthly gain in over 6 years, it could face hurdles this week.
The White House is set to announce reciprocal trade levies on April 2, and President Donald Trump has promised to match the duties imposed by countries on U.S. exports.
The rupee has benefited from a recent weakness in the dollar and the Reserve Bank of India allowing for a two-way movement, but "key risks to India's external sector balance continue to stem from the uncertainties on U.S. trade/tariff policies," Kotak Institutional Equities said in a note.
"We pencil in USD/INR in a range of 85-89 in FY2026," the note said, adding that the forecasts would be revisited once the tariffs are announced.
Traders will also keep an eye on how the RBI responds to reactions in the foreign exchange market.
The RBI "could allow a sizeable rise (on USD/INR) since it has retreated quite a bit in March," in case of a negative surprise, a trader at a Mumbai-based bank said.
In addition to the tariffs, U.S. economic data and remarks from Federal Reserve policymakers will also be in focus through the week.
Meanwhile, traders expect the benchmark 10-year bond yield to hover in the 6.52%-6.60% range this week. The yield ended at 6.5823% on Friday, down 4 basis points for the week.
It fell 15 bps in March, the biggest decline in 10 months. For the year, the 10-year yield has plunged 47 bps so far, its biggest drop in five years.
Bond yields dropped in the previous financial year as large foreign inflows and the dovish tilt from global central banks fuelled investor appetite for local debt.
Bond market participants anticipate the bullish trend to continue in the first week of the new financial year amid rising bets that the RBI will deliver a second consecutive interest rate cut next week.
The central bank's monetary policy decision is due on April 9, and a Reuters poll of economists predicted just one more rate cut in August, which would mark its shortest easing cycle on record.
Sentiment has remained favourable after the domestic retail inflation eased to 3.61% in February - the lowest since July 2024 - from 4.26% in January, with market participants anticipating another benign inflation reading for March.
"The February MPC meeting began the rate cutting cycle, and we believe it will carry on in April, with some forward guidance, giving assurance that monetary policy will focus on reviving growth momentum, while keeping headline inflation within its tolerance band of 2%-6%," said Rahul Bajoria, head of India and ASEAN Economic Research at BofA Global Research.
The central government's debt auction cycle will also resume this week, with New Delhi's debt supply at lower-than-expected in April-September, that will further steepen the yield curve.
KEY EVENTS:
India
** March HSBC manufacturing PMI - April 2, Wednesday (10:30 a.m.)
** March HSBC services and composite PMI - April 4, Friday (10:30 a.m.)
U.S.
** February factory orders - April 2, Wednesday (7:30 p.m. IST)
** February international trade - April 3, Thursday (6:00 p.m. IST)
** Initial weekly jobless claims for week to March 24 - April 3, Thursday (6:00 p.m. IST)
** March S&P global services PMI final - April 3, Thursday (7:15 p.m. IST)
** March S&P global composite PMI final - April 3, Thursday(7:15 p.m. IST)
** March ISM non-manufacturing PMI - April 3, Thursday (7:30 p.m. IST)
** March non-farm payrolls and unemployment rate - April 4, Friday (6:00 p.m. IST)
(Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Varun H K)
