Indian shares slumped 2.3% and yields on the benchmark 10-year bond jumped after a surprise interest rate hike which came just hours ahead of a much awaited monetary policy decision by the U.S. Federal Reserve.

Emerging markets shares were already jittery ahead of the Fed decision as investors look for clues on its thinking about the future pace of hikes, with a 50 basis point increase already priced in.

MSCI's index of developing world shares deepened losses in its third straight session of declines, down 0.6%.

Indian shares posted their worst session in two months, while the 10-year benchmark bond yield jumped to 7.41%, its highest level since May 2019, after the Reserve Bank of India hiked the key interest rate by 40 basis points in an off-cycle meeting to rein in inflation.

The rupee briefly hit 76.18 a dollar, before trading back at levels before the decision. It was last at 76.34.

"Looking ahead, further rate hikes look nailed on. After all, the rise in headline inflation (in India) has further to run... We now expect the repo rate to end this year at 5.65%," said Shilan Shah, senior India economist at Capital Economics.

The impact on the equity market is likely to be negative in the short term, said Sujan Hajra, chief economist at Anand Rathi Securities.

Further curbing risk appetite, the European Union proposed a phased oil embargo on Russia in its sixth sanctions package over Moscow's invasion of Ukraine. The proposal also included sanctions on Russia's top bank and banning its broadcasters from European airwaves.

But Russia's rouble jumped to around two-year highs against both the dollar and the euro, supported by strong capital controls. The offshore rouble was at around 66 to the dollar. In Moscow it was at around 68, recovering sharply over two months from its all-time low of 121 per dollar hit in March.

With more sanctions against Russian oil spurring global crude prices, oil importing countries such as India, the Philippines and Turkey face more pain.

In more central bank news, Pakistan named Murtaza Syed, a deputy governor of the bank as its new chief as the country restarts talks with the International Monetary Fund (IMF) on a stalled $6 billion programme.

Syed will take over upon the expiry of the three-year term of incumbent Reza Baqir, Finance Minister Miftah Ismail said on Wednesday.

Pakistan markets were closed for Eid-ul-Fitr.

(Reporting by Susan Mathew in Bengaluru; Editing by Alex Richardson and Tomasz Janowski)