USD/INR likely to take cues from moves in the euro as well as the global risk environment. Pair is seen trading in a 54.50-56 range.
Dealers say any move by the government to push reforms after presidential election results on Sunday would be positive for both bonds and the rupee. Markets are expecting a hike in diesel prices to curb the government's subsidy burden, as well a move to allow foreign players into multi-brand retail and aviation.
These measures would help ease concerns about India's fiscal deficit. Fiscal reforms could also be key for interest rates, given the Reserve Bank of India has been urging the government to lower its fiscal deficit to enable better monetary policy transmission. However, few analysts expect the RBI to cut the repo rate at its July 31 policy review after RBI chief Duvvuri Subbarao warned about inflation.
Indian federal bonds are expected to remain supported, with liquidity seen comfortable. The cash deficit is expected in Rs 50,000-70,000 crore range over the next two weeks. The benchmark 8.15% 2022 bond is expected to trade in a 8-8.15% range. India will sell Rs 15,000 crore of bonds next week.