MUMBAI/BENGALURU (Reuters) - The rupee fell to a one-week low on Thursday, while bonds also slumped after the U.S Federal Reserve signalled a faster-than-expected pace of tightening next year, raising concerns about outflows from emerging markets.
There was no sign of Reserve Bank of India intervening in the currency market, but dealers said the central bank could step in if the rupee fell sharply.
The rupee fell to as low as 67.8350 to the dollar, the lowest since November 7, from Wednesday's close of 67.44, while the 10-year benchmark bond yield rose 6 basis points to 6.46 percent.
The National Stock Exchange benchmark index gained 0.4 percent, after earlier falling as much as 0.73 percent, as investors also felt recent falls were overdone.
Gains were led by IT stocks, with the sector's index rising as much as 1.69 percent to its highest since Oct. 25.
The RBI unexpectedly kept interest rates on hold last week, citing in part concerns that currency volatility resulting from the Fed's actions could impact India's inflation.
But analysts said it was too soon to say whether the Fed's stance meant the RBI was unlikely to make an expected rate cut at its next policy review in February.
The Fed in a unanimous decision raised the range for the federal funds rate by a quarter percentage point, as expected, and signalled three rate hikes in 2017 instead of the two foreseen when the Federal Open Market Committee met in September.
India is seen as relatively better placed than other emerging markets to weather the impact of higher U.S. interest rates because of the country's stronger economic growth and record high foreign exchange reserves of more than $300 billion.
But it has not been immune to foreign investor selling since the election of Donald Trump as U.S. president sparked a shift of flows from emerging markets into the United States.
Outflows from Indian debt and equity markets have reached $7 billion since the start of November, helping send the rupee to a record low of 68.8650 per dollar last month. But for the year outflows are at a net $1.4 billion.
(Reporting by Suvashree Dey Choudhury and Aby Jose Koilparambil; Editing by Simon Cameron-Moore)