Indian rupee weakens, bond yields slip ahead of FOMC outcome

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FILE PHOTO: Illustration photo of an India Rupee note

By Swati Bhat

MUMBAI (Reuters) - The Indian rupee weakened on Wednesday, tracking losses in other Asian peers, while bond yields fell in late trade tracking the downtrend in their U.S. peers ahead of the Federal Reserve's policy meeting outcome.

Money markets are betting that the Fed will raise rates by 75 basis points (bps), with an outside chance of a larger 100 bps hike. Traders expect the Fed to take the rate to as high as 3.4% by year-end to help bring inflation back to its target.

U.S. Treasury yields trended lower driven by a flight to safety, following the latest supply cuts in gas supply from Russia to Europe and growing concerns about a U.S. economic slowdown as seen in Walmart's profit warning. [US/]

India's benchmark 10-year bond yield ended at 7.34%, down 3 bps on the day while the partially convertible rupee closed trading at 79.8975 per dollar compared to its close of 79.78 on Tuesday.

"The Fed rate hike of 75 bps is largely priced if. If they do a 100 bps, we could see some sell-off in equities tomorrow which could pressure the rupee towards 80 levels," a senior trader at a private bank said.

Emerging market equities slid as investors braced for a potentially sharp U.S. rate hike later in the day, while regional currencies struggled as the dollar hovered just below a 20-year high on support from safe-haven flows.

Traders are also likely to remain wary of adding large positions ahead of the Reserve Bank of India's monetary policy committee meeting next week where it is widely seen raising rates by 25 to 50 bps.

Foreign funds have been net sellers of Indian equities so far in 2022, having sold around $30 billion worth of shares, but have been buyers of around $50 million so far in July.

(Reporting by Swati Bhat; Editing by Uttaresh.V and Shailesh Kuber)

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