Rupee sees biggest gain in seven months post Fed; bonds up for second day

By Swati Bhat

MUMBAI (Reuters) - The BSE Sensex and Nifty rallied on Thursday, with the rupee posting its biggest single-day gain in seven months and rebounding from a 13-month low, after the U.S. Federal Reserve said it would take a "patient" approach in deciding when to raise interest rates.

Reserve Bank of India Governor Raghuram Rajan had called the prospect of U.S. rate hikes a risk to emerging markets given expectations that overseas investors may pare their bets on higher-yielding debt of countries such as India.

Indian shares and bonds also benefited as Russia's rouble stabilised after dramatic falls this week, reducing some of the fears of financial contagion to emerging markets.

Bonds and the rupee were still headed for their worst week since August, when global markets were roiled by rising tensions in the Middle East and uncertainty about Fed rate hikes.

"The fact that rate hikes will still be data dependant and Fed will be patient is positive for the rupee," said Hari Chandramgethen, head of foreign exchange trading at South Indian Bank, who does not expect a Fed rate hike until June.

Traders said large dollar-selling by foreign banks on behalf of their overseas clients was a key reason helping the rupee and bonds during the session. The flows will remain a key factor in the near-term for markets.

The partially convertible rupee ended at 63.11/12 per dollar versus its Wednesday's close of 63.6150/6250. It had touched 63.89 in the previous session, its weakest level since Nov. 13, 2013.

On the day, the rupee gained 0.8 percent, its biggest single-day gain since a similar rise seen on May 16 when election results gave the Bharatiya Janata Party a full mandate.

Fed Chair Janet Yellen told a news conference that "patient" meant the U.S. central bank was unlikely to hike rates for "at least a couple of meetings," meaning April of next year at the earliest.

The benchmark 10-year bond yield ended down 4 basis points on the day at 7.93 percent. The yield rose to 8.03 percent on Wednesday, its highest level since Dec. 1.

In the overnight indexed swaps market, the benchmark 5-year swap rate dropped 6 basis points to 7.28 percent, while the 1-year rate fell 7 basis points to 7.85 percent.

Meanwhile, shares gained 1.6 percent on hopes of tax reforms and underpinned by the global rally.

(Reporting by Swati Bhat; Editing by Prateek Chatterjee)