By Dharamraj Dhutia and Nimesh Vora

MUMBAI, Jan 27 (Reuters) - The direction of the Indian rupee this week will depend on updates regarding U.S. tariffs, while any cues from the Federal Reserve about their meeting in March will influence both the currency and government bonds.

The rupee last week rose 0.5% to 86.2050 to the U.S. dollar, marking its best performance in 17 months, after U.S. President Donald Trump delayed imposing tariffs upon taking office, offering relief to the rupee and other Asian currencies.

"I think the news on Trump's tariffs will be the main driver for the forex market for the time being," said Kunal Kurani, associate vice president at Mecklai Financial.

"Right now, there is relief that the worst has not come to pass. What happens next, nobody actually knows."

Despite last week's gain, the bias on the rupee remains tilted on the downside. Kurani mentioned he has been advising his importer clients to buy on any relief rallies on the Indian currency.

Meanwhile, the Fed is widely expected to make no changes to the policy rate this week, but any guidance for policy action in March would be the main trigger for markets.

"Attention will be on whether the March meeting is 'live' or the Fed is on an extended pause, ANZ said in a note.

India's benchmark 10-year bond yield IN067934G=CC ended at 6.7206% on Friday, easing four basis points for the week.

Traders expect the Indian 10-year bond yield to be in the 6.65%-6.72% range this week, with the focus on movement in Treasury yields and the build-up of positions in the run-up to India's federal budget announcement, due on Feb.1.

The budget's major focus is said to be on the fiscal deficit target and the gross borrowing figure for the next financial year.

"The market will also look for whether the budget is expansionary, as that could impact inflation and, ultimately, interest rate trajectory," a trader with a primary dealership said.

HDFC Bank expects fiscal deficit for the current financial year at 4.7% of gross domestic product, 20 basis points lower than the budget estimate, but it does not foresee a reduction in the gross market borrowings.

Gross borrowings for fiscal 2026 are estimated at 14.8 trillion rupees ($171.73 billion), although this could be reduced if the government continues its buyback of securities maturing in the next fiscal.

The central government has bought back around 580 billion rupees of bonds maturing in 2025-26 so far.

Investor sentiment was further lifted after the RBI made net purchases of government bonds worth 101.75 billion rupees in the secondary market last week, marking the first such operation in more than three years, data released on Friday showed.

Throughout the week, market participants will also be closely monitoring whether the government proceeds with a direct bond switch with the Reserve Bank of India, which is reckoned to be holding around 1 trillion rupee worth of bonds maturing next year.

KEY EVENTS:

** India December fiscal deficit data - Jan. 31, Friday (3:30 p.m. IST)

** India December infrastructure output - Jan. 31, Friday (5:30 p.m. IST)

** U.S. December new home sales - Jan. 27, Monday (8:30 p.m. IST)

** U.S. December durable goods - Jan. 28, Tuesday (7:00 p.m. IST)

** U.S. January consumer confidence - Jan. 28, Tuesday (8:30 p.m. IST)

** U.S. Federal Reserve monetary policy decision - Jan. 30, Thursday (12:30 a.m. IST)(Reuters poll: no change)

** European Central Bank monetary policy decision - Jan. 30, Thursday (5:45 p.m. IST) (Reuters poll: 25 bps cut)

** U.S. October-December advance GDP estimate - Jan. 30, Thursday (7:00 p.m. IST) (Reuters poll 2.6%)

** U.S. initial weekly jobless claims week to Jan. 20 - Jan. 30, Thursday (7:00 p.m. IST)

** U.S. December personal consumption expenditure index, core PCE index - Jan. 31, Friday (7:00 p.m. IST) ($1 = 86.1840 Indian rupees)

(Reporting by Dharamraj Dhutia and Nimesh Vora; Editing by Janane Venkatraman and Sherry Jacob-Phillips)

((Dharamraj.dhutia@tr.com))