Rupee gives up most gains on caution ahead of Fed policy outcome

The rupee gave up most gains on Wednesday as investors covered their short dollar positions ahead of the outcome of the US Federal Reserve's two-day policy meeting, while weaker local shares also hurt.

The Fed is expected to cut monthly debt purchases by another $10 billion, after cutting it by the same amount in December. Continued reduction in US stimulus could curb the waves of cheap money that had benefited emerging markets such as India in recent years.

Uncertainty about Fed tapering, and concerns about an economic slowdown in China, had sparked a rout in emerging markets, although risk assets rebounded after Turkey sharply raised interest rates.

Turkey's rate hike comes after the Reserve Bank of India had raised interest rates on Tuesday for a third time in five months, although that had been intended to contain inflation and not shore up the rupee.

RBI Governor Raghuram reiterated on Wednesday his belief that India is better prepared for foreign exchange outflows than it was last summer when the rupee tumbled to a record low because of similar Fed tapering fears.

"Everyone was short squaring their positions ahead of the FOMC outcome. If there is a further cut in asset purchases by the Fed some weakness in the rupee is expected, but it should not hurt in a very major way," said Hari Chandramgethen, head of foreign exchange trading at South Indian Bank.

The partially convertible rupee closed at 62.41/42 per dollar compared with 62.51/52 on Tuesday after moving in a range of 62.1050 to 62.52 during the session.

Traders expect the pair to hold in a broad 62.00 to 62.60 range on Thursday.

The rupee was also hit after India's NSE share index fell for a fourth consecutive session on Wednesday to its lowest close in two months as banks were hit after India's biggest private lender, ICICI Bank, said bad loans had risen and that it would set aside more funds.

In the offshore non-deliverable forwards, the one-month contract was at 62.85, while the three-month was at 63.71.