India rupee, bonds expected to move higher in run-up to RBI policy decision

By Dharamraj Dhutia and Jaspreet Kalra

MUMBAI, June 2 (Reuters) - The Indian rupee is likely to kick off the week on a positive note, boosted by stronger-than-expected economic growth data, and, alongside government bonds, will be influenced by the central bank's monetary policy decision, due on Friday.

The rupee closed at 85.5075 against the U.S. dollar last Friday, down 0.4% in a week dominated by choppy price action across forex markets.

Data after the market close on Friday showed India's gross domestic product (GDP) grew 7.4% in the January-March quarter, the fastest in a year, and above economists' expectations of 6.7%.

The strong growth may lift equities, which should help the rupee both via portfolio inflows and a sentimental boost, a trader at a foreign bank said.

Traders expect the rupee to hover in a 84.80-86 range in the near term.

Developments surrounding U.S. tariff policies also be in focus this week. U.S. President Donald Trump on Friday accused China of violating a bilateral deal to roll back tariffs and announced a doubling of worldwide steel and aluminum tariffs to 50%.

A team of U.S. trade officials, meanwhile, is slated to visit India on June 5-6.

The Reserve Bank of India is widely expected to deliver a third straight 25-basis-point rate cut on June 6, lowering the key rate to 5.75%.

"The big macro picture for INR and India is that inflation is likely to remain manageable for some time ... with CPI expected to remain below 4% over the next few quarters," MUFG Bank said in a note.

India's 10-year benchmark 6.33% 2035 bond yield pared its earlier losses to end flat at 6.2308% on Friday. It fell to 6.1672% in the week.

Traders anticipate the yield to move between 6.18% and 6.26% until the RBI decision.

The five-year bond yield outperformed the 10-year yield for a third straight month in May.

"There has been a bull-steeping in the bond market. The market anticipates the RBI will cut rates and is at extreme bullish positioning," said Vishal Goenka, co-founder of bond trading platform, IndiaBonds.com.

Capital Economics expects growth to remain strong over the coming quarters and eyes a further 50 bps of interest rate cuts.

KEY EVENTS:

India

** May HSBC manufacturing PMI - June 2, Monday (10:30 a.m.)

** May HSBC services PMI - June 4, Wednesday (10:30 a.m.)

** RBI monetary policy decision - June 6, Friday (10 a.m.)

U.S.

** May S&P Global Flash manufacturing PMI final - June 2, Monday (7:15 p.m. IST)

** May ISM manufacturing PMI - June 2, Monday (7:30 p.m. IST)

** April factory orders - June 3, Tuesday (7:30 p.m. IST)

** May S&P Global composite PMI final - June 4, Wednesday (7:15 p.m. IST)

** May S&P Global services PMI final - June 4, Wednesday (7:15 p.m. IST)

** May ISM non-manufacturing PMI - June 4, Wednesday (7:30 p.m. IST)

** April international trade - June 5, Thursday (6:00 p.m. IST)

** Initial weekly jobless claims (for week to May 26) - June 5, Thursday (6:00 p.m. IST)

** May non-farm payrolls and unemployment rate - June 6, Friday (6:00 p.m. IST)

(Reporting by Dharamraj Dhutia and Jaspreet Kalra; Editing by Savio D'Souza)