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By Dharamraj Dhutia and Nimesh Vora

MUMBAI, Jan 27 (Reuters) – A heavily pressured Indian rupee steps into a week in which the U.S. Federal Reserve is scheduled to deliver its first policy decision of the year, while local government bonds ​are seen supported in the run-up to the country’s annual budget.

The rupee declined about 1.2% last week in its steepest ‌fall in six months, after touching an all-time low of 91.9650.

Equity outflows picked up pace through last week, while importer hedging was higher relative to exporters amid expectations ‌of further depreciation taking hold. The breach of the 91 per dollar level drew in additional speculative interest, amplifying dollar demand.

“With these pressures unlikely to fade in the near term, the rupee’s downside bias should remain firmly in place this week,” said Kunal Kurani, vice president, Mecklai Financial.

Beyond flows, the rupee will have to navigate two key events in the week, beginning with the Fed’s policy decision on Wednesday.

While no change in interest ⁠rates is expected, traders will parse the Fed ‌statement and Chair Jerome Powell’s press conference for signals on the timing of future cuts, if any.

India’s annual budget is scheduled for Sunday, though traders expect limited pre-emptive positioning in the currency.

Meanwhile, in a positive ‍for the rupee this week, India and the European Union concluded negotiations on a long-coveted trade deal, an accord both sides hailed was historic amid strained U.S. ties.

BONDS

The 10-year benchmark 6.48% 2035 yield settled at 6.6635% on Friday, notching a marginal decline, after rising for the previous three weeks as supply ​outpaced demand.

Traders expect the yield to move in a 6.61%–6.70% range this week.

Bonds could see a positive start after the RBI announced ‌yet another liquidity infusion plan, as it will buy bonds worth 1 trillion rupees and conduct a $10 billion swap in February.

The market would look for hints from the government to address the worsening demand-supply scenario.

In focus will be the gross borrowing announcement and whether New Delhi plans to raise net issuances of treasury bills.

A Reuters poll has pegged the gross borrowing at a record 16.27 trillion rupees for the next financial year, with Nomura expecting the figure to be 17.5 trillion rupees.

“On the fiscal front, we see the consolidation continuing, although ⁠at a lesser pace, and expect FY27 fiscal deficit to be pegged at ​4.25% – 4.30%,” Vikas Garg, head of fixed income at Invesco Mutual Fund.

“The market ​will closely watch the funding pattern of fiscal deficit, and we expect an increased proportion of small saving schemes and T-bill issuance for FY27.”

Still, there could be some pressure as states are set to borrow nearly 400 ‍billion rupees via bond sale, while ⁠New Delhi will auction the benchmark paper for 320 billion rupees on Friday. KEY EVENTS:

India ** December industrial output – January 28, Wednesday (4:00 p.m. IST)

** December fiscal deficit – January 30, Friday (3:30 p.m. IST) U.S. ** January consumer confidence – January 27, Tuesday (8:30 p.m. IST) ** Federal Reserve ⁠monetary policy decision – January 29, Thursday (12:30 a.m. IST)

** November international trade – January 29, Thursday (7:00 p.m. IST) ** Initial weekly jobless claims for week to January 24 – January 29, ‌Thursday (8:30 p.m. IST)** November factory orders – January 29, Thursday (8:30 p.m. IST)

** December PPI machine manufacturing – January 30, Friday (7:00 p.m. ‌IST)

(Reporting by Dharamraj Dhutia and Nimesh Vora; Editing by Harikrishnan Nair)