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Indian Rupee Surges 2.7% After Fed Surprise; Bonds, Stocks Rally

India’s rupee jumped 2.7 percent to a one-month high after the U.S. unexpectedly refrained from cutting stimulus that’s buoyed emerging-market assets. Bonds and stocks rallied.

The Federal Open Market Committee said yesterday it wants to see more evidence of a recovery in the world’s largest economy before starting to taper its $85 billion a month of bond purchases. Economists surveyed by Bloomberg had forecast a reduction of $5 billion. The committee is concerned that the rapid tightening of financial conditions in recent months could damp growth, Fed Chairman Ben S. Bernanke said at a press conference yesterday in Washington.

“The surprising Fed decision is naturally supportive of risk appetite in emerging markets” and “the effect on the current account-deficit countries could be larger,” Koon Chow, head of emerging-market strategy at Barclays Plc in London, wrote in an e-mailed note. “As their currencies rally, some of the priced-in expectations of aggressive monetary tightening may be unwound as well, with local bonds enjoying a lift.”

The rupee appreciated 2.7 percent to 61.71 per dollar as of 9:36 a.m. in Mumbai, according to prices from local banks compiled by Bloomberg. It touched 61.6525 earlier, the strongest level since Aug. 16.

The yield on the 7.16 percent Indian sovereign notes due May 2023 slumped 20 basis points, or 0.2 percentage point, to 8.18 percent, according to the central bank’s trading system. That’s the lowest level since Aug. 8. The 30-stock S&P BSE Sensex (SENSEX) of local shares climbed 2.7 percent to 20,501.54, poised for its highest close since January 2011.

Fed Outlook

The Fed left unchanged its outlook that its target interest rate will remain near zero “at least as long as” unemployment exceeds 6.5 percent, so long as the outlook for inflation is no higher than 2.5 percent, according to a statement. The U.S. will release jobless claims and existing home sales reports later today.

The Reserve Bank of India will review policy tomorrow after government data this week showed wholesale-price inflation unexpectedly rose to a six-month high of 6.1 percent in August. Governor Raghuram Rajan will leave the benchmark repurchase rate unchanged at 7.25 percent, according to all 36 economists surveyed by Bloomberg.

Overseas funds sold a net $84.9 million of Indian bonds on Sept. 17, after pulling out $213.5 million on Sept. 16, which was the most in three weeks, exchange data show. They have reduced holdings of Indian notes by more than $10 billion since May 22, when Bernanke first flagged a potential paring of asset purchases.

To contact the reporter on this story: Shikhar Balwani in Mumbai at sbalwani@bloomberg.net

To contact the editor responsible for this story: James Regan at jregan19@bloomberg.net

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