Headline inflation data on Monday will be the key cue for India's debt markets, coming ahead of the RBI's policy review on July 31. A Reuters poll forecasts wholesale price inflation likely rose by 7.62 percent in June from a year ago, the highest this year.
Traders who had previously bet the Reserve Bank of India would keep the repo rate on hold are now slowly shifting views towards a rate cut after the sharp downward revision in the April factory output data on Thursday.
An inflation print of 7.25 percent or below, and core inflation of 4.5 percent or below, could firm views for a 25 basis points rate cut traders said, pushing bond yields and OIS rates down by around 4-6 basis points.
The benchmark 5-year OIS fell to as low as 6.96 percent on Thursday, its lowest since late December 2011, while the one-year rate touched a low of 7.56 percent, its lowest since mid-June 2012.
Traders expect the rupee to remain choppy next week, given volatile global risk environment, with 56/dollar acting as key resistance. India's presidential elections are on Thursday, with former finance minister Pranab Mukherjee expected to be selected for the ceremonial post.
Investors have been hopeful the elections will mark the start of fiscal policy reforms from the government, such as a hike in diesel prices.
India's worsening fiscal outlook has been a key reason behind the rupee's slump this year.