The Indian rupee is expected to extend its gains this week, while government bond yields may move marginally higher due to worries about yet another year of elevated borrowing.
With a holiday-shortened week in India, the Chinese New Year, and no major data releases apart from U.S. economic growth and consumption prints towards the end of the week, market participants will keep a close eye on foreign portfolio inflows into Indian markets.
The rupee rose for a second straight week, gaining 0.25% over last week to end at 81.12 per dollar on Jan. 20, as the greenback slid on soft U.S. data.
The local unit is likely to add to its momentum and trade in a broad 80.50-81.50 range this week, analysts said.
"The rupee is expected to appreciate, but it may not go beyond 80.50-80.75 as the central bank could step in at those levels," said Arnob Biswas, head of FX research at SMC Global Securities.
NSDL data showed overseas investors have pulled out around $1.9 billion from Indian equities (.NSEI) so far this year, while bonds have received a small inflow.
Meanwhile, India's benchmark bond yield ended at 7.3478% on Friday, having gained 5 basis points (bps) last week after easing 7 bps in the week prior.
Market participants expect the benchmark bond yield to trade in the 7.30%-7.40% band this week.
"The market is cautious and under pressure, as we are likely to see a heavy borrowing calendar in a year where there may be some worries over demand," said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank.
The government will present the union budget for the next fiscal year on Feb. 1, but the main focus for investors will be on the fiscal consolidation path and gross borrowing calendar.
Most foreign banks expect gross supply in the range of 15.50 trillion rupees to 16.80 trillion rupees ($191 billion to $207 billion), with estimates from Barclays and Goldman Sachs on the higher side.
Still, shorter-tenor government bond yields are expected to fall further on bets of a turn in U.S. monetary policy later in the year and as foreign banks accelerate their bond purchases in 2023, analysts said.
Traders will also keep an eye on demand for India's first-ever sovereign green bond issue. The Reserve Bank of India will auction 40 billion rupees each of five- and 10-year green bonds on Wednesday.
