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The Indian rupee is expected to trade with a bearish bias this week after slumping to a record low on Friday, with traders watching out for how sternly the central bank defends the local currency while bond yields will track U.S. peers and the rupee.

The rupee hit its all-time low of 84.8075 on Friday before closing at 84.5325, down nearly 0.3% on the week.

The currency has declined for eight consecutive weeks amid a confluence of negative global and domestic factors including a broadly stronger dollar and concerns about India's slowing growth and widening trade deficit.

The dollar index ended the week higher by 0.4%, its fourth consecutive weekly rise.

Market participants expect the rupee to carry the prevailing bearish bias into 2025. Muted trading in this week's first half due to the year-end, could keep it rangebound.

Given the "weak global set-up facing emerging market currencies", the rupee is likely to continue declining unless the Reserve Bank of India adopts a stronger approach to defending it, a trader at a private bank said.

Traders expect the rupee to hover between 85.40 and 85.90 per dollar this week. "Rupee volatility seems to be back and we should see bigger movements in the (USD/INR) currency pair as we move forward," said Anil Bhansali, head of treasury at Finrex Treasury Advisors.

The rupee's 1-month implied volatility rose to an over-15-month high of 3.5% last week.

Meanwhile, the benchmark 10-year bond yield ended at 6.7852% last week, up marginally, after rising 6 basis points in the previous week, as the slump in the rupee weighed.

Traders expect the yield to be in a 6.76%-6.84% range this week, with the focus on Treasury yields as well as movement in the currency.

The 10-year U.S. yield hit its highest level in nearly eight months last week amid concerns over the pace of rate cuts from the Federal Reserve in 2025.

Market participants also remain concerned over depleting banking system liquidity in India, which is set to slip further into deficit in the upcoming quarter.

"The first thing should be allowing the rupee to move in line with fundamentals and to not waste your reserves and create a further hole in the liquidity situation," said A Prasanna, head of research at ICICI Securities Primary Dealership.

"The strategy on forex intervention should be clearer and parallelly they will have to do more on the liquidity side."

Market participants will watch foreign flows in the New Year. The pace of bond purchases from overseas investors has slowed down over the last few sessions, after a grand start to the month.

KEY EVENTS:

** India November fiscal deficit - Dec. 31, Tuesday (3:30 p.m. IST)

** India November infrastructure output - Dec. 31, Tuesday (5:30 p.m. IST)

** HSBC India December manufacturing PMI data - Jan. 2, Thursday (10:30 a.m. IST)

** U.S. initial weekly jobless claims week to Dec. 23 - Jan. 2, Thursday (7:00 p.m. IST)

** U.S. December S&P global manufacturing PMI final - Jan. 2, Thursday (8:15 p.m. IST)

** U.S. December ISM manufacturing PMI - Jan. 3, Friday (8:30 p.m. IST)