Likely surge in bond yields along with rising COVID-19 cases in India are expected to weaken the Indian rupee during the upcoming week.
Besides, persistently high energy costs could subdue the market sentiments looking to push the rupee up. However, re-commencement of Foreign Institutional Investors (FIIs) inflows will arrest any major fall in rupee's value vis-a-vis the US dollar.
"Rising trade deficit as well as concerns over US Fed's taper measures and rising yields can put pressure on rupee in coming year," said Sajal Gupta, Head, Forex and Rates at India-based Edelweiss Securities.
"Crude oil too can play spoil sport if it moves towards the 85 levels. Omicron concerns too may dampen the sentiment."
India on Monday recorded 1,79,723 fresh COVID-19 cases, pushing the active caseload to 7,23,619. The daily positivity rate stood at 13.29 per cent, while 146 deaths were recorded in the last 24 hours.
According to the Indian Ministry of Health, the Omicron tally in the country stood at 4,033, with Maharashtra (1,216) continuing to top the count. This was followed by Rajasthan (529), Delhi (513) and Karnataka (441).
INR rangebound last week
Last week, the Indian rupee was rangebound to close at 74.31 to a US dollar. In that period, inflows from Reliance's US dollar bond issuance kept rupee tethered near 74.30 despite the surge in dollar index and higher crude oil prices.
"This week, surging bond yields, fears of higher COVID-19 infections, high energy costs and RBI's intervention could spoil the party of rupee bulls (gaining market)," said Devarsh Vakil, Deputy Head of Retail Research, India-based HDFC Securities. "We expect the rupee to trade between 74.20 to 74.90 this week with a weakening bias."
According to Gaurang Somaiya, Forex & Bullion Analyst, India-based Motilal Oswal Financial Services: "This week, on the domestic front, market participants will be keeping an eye on the inflation and industrial production number. An uptick in inflation could raise rate hike prospects by the RBI but at the same time a disappointing industrial production could dampen rate hike hope.
We expect the rupee to trade between 74.20 to 74.90 this week with a weakening bias.
"From the US, focus will be on the US central bank chairman's testimony, inflation and retail sales number. A hawkish statement from the Fed Chairman and better-than-expected retail sales number could extend gains for the greenback."
The Central Statistics Office (CSO) in India is slated to release the macro-economic data points of IIP (index of industrial production) and CPI (inflation) on January 12.