MUMBAI - The Indian rupee saw its biggest single-day gain in more than two months on Thursday, tracking strength in most other Asian peers and shares, while bond yields inched lower after comments from U.S. Federal Reserve Chair Jerome Powell.
Powell sounded suitably hawkish on curbing inflation in his news conference, but also dropped guidance on the size of the next rate hike and noted that "at some point" it would be appropriate to slow down.
India's partially convertible rupee ended trading at 79.7550 compared to its close of 79.8975. It gained 0.2% on the day, its biggest daily rise since May 20.
India's benchmark 10-year bond yield ended at 7.33%, down 1 basis point on the day.
U.S. Treasury yields edged lower as bonds rallied after the Fed raised rates by 75 bps, in line with market expectations.
The U.S. dollar slumped to a three-week low versus the Japanese yen and struggled against its other major rivals on Thursday as markets ramped up bets on a softening in the pace of rate hikes.
Traders said focus has now shifted to the monetary policy committee meeting of the Reserve Bank of India (RBI) due next week. Though the broad consensus was for a 50-basis-point rate hike, views are likely to be tempered after Fed's decision.
"We expect the RBI's monetary policy committee to vote unanimously for a 35 bps rate hike during next week's policy review meeting," Barclays economists said in a note.
"While inflation is likely to remain elevated in the near term, we think the MPC may acknowledge that price pressures have peaked, and note the favourable tailwinds by reducing its inflation forecasts, albeit marginally."
Traders said they would also be focussing on the central bank's views on liquidity after the recent tightness in the money markets which has pushed the inter-bank call money rate to above the marginal standing facility rate.
"With inflation drivers easing, I see terminal repo rate in range of 6%-6.25% for now, and a longish period of pause post that," said Akhil Mittar, senior fund manager at Tata Mutual Fund wrote in a note.
"I believe growth situation in India is not as bad as in west (recessionary expectations rising in the west) and RBI might not be immediately pushed to support growth," he added.
(Reporting by Swati Bhat; Editing by Sherry Jacob-Phillips and Bernadette Baum)