Rupee hits 16-month high, but shares flat ahead of Fed decision

MUMBAI (Reuters) - The Indian rupee hit a 16-month peak against the dollar on Wednesday on hopes of increased foreign investments in equities, but the stock market flattened a day after the NSE index hit a record high.

Meanwhile, benchmark 10-year bond yields fell 3 basis points to 6.87 percent after data released late on Tuesday showed that February consumer inflation came largely in line with expectations.

Sentiment has been boosted after results over the weekend showed that the ruling Bharatiya Janata Party (BJP) scored an overwhelming win in the key state of Uttar Pradesh. The victory was widely seen as a strong endorsement of Prime Minister Narendra Modi's agenda.

Foreign investors were net buyers of 41 billion rupees ($625.76 million) of shares on Tuesday, when the NSE Nifty hit a record high of 9,122.75, according to BSE data. That marked the biggest single-day net purchase since Feb. 17, according to Thomson Reuters estimates.

This helped the rupee climb as far as 65.41 per dollar on Wednesday, its strongest since November 2015, compared with its previous close of 65.80. Two traders said the Reserve Bank of India stepped in for a second straight day to cap gains.

Stock markets were largely flat, with the Nifty up 0.08 percent and the BSE Sensex 0.05 percent higher as sentiment turned tepid ahead of the outcome of the U.S. Federal Reserve's meeting later in the day.

The Fed is almost universally expected to raise its benchmark interest rates, but investors are keen on seeing how much more tightening will happen this year.

Worries about the Fed and concerns about domestic share valuations could cap further gains in equities, analysts said, even as broader sentiment remains positive.

"The market is definitely in a bullish phase but it is difficult to say how long the positive effect of BJP's win will last," said Mugilan K, deputy manager of research at Cholamandalam Securities.

Among gainers, Idea Cellular Ltd rose as much as 13 percent after CNBC-TV 18 reported the company would sell a majority stake in its tower business to American Tower Corp, citing unidentified sources.

IT stocks fell on worries about the stronger rupee. Tata Consultancy Services Ltd dropped 2.5 percent, while Infosys Ltd fell 2.4 percent.

($1 = 65.5250 Indian rupees)

(Reporting by Arnab Paul in BENGALURU and Rafael Nam in MUMBAI; Editing by Subhranshu Sahu)