The Indian rupee hit a more than 1-1/2 year high on Friday after the Reserve Bank of India (RBI) held its policy rate and expressed concerns about inflation, raising expectations it would no longer cut rates this year, while bonds fell and shares edged lower.
The RBI held the repo rate at 6.25 percent on Thursday, as widely expected, and raised its inflation forecasts, increasing expectations it could even tighten should prices accelerate.
Before the meeting, 21 of 34 economists had predicted stable prices would allow the RBI to cut rates this year.
The rupee strengthened to as much as 64.32 per dollar, its highest since August 2015, after also rallying on Thursday. It was last trading at 64.4025/4075 compared with Thursday's close of 64.52.
Bonds extended falls, with sentiment also hit after the RBI said it would start curbing excess liquidity after the government's move to withdraw higher-value bank notes from circulation led to a surge in bank deposits.
The benchmark 10-year bond yield rose 5 basis points to 6.82 percent after rising 12 basis points on Thursday.
"We do not expect any more rate cuts given (that) the journey to 4 percent inflation remains challenging. Yet we believe that weaker than expected growth will not allow the RBI to start increasing the policy repo rate over 2017," HSBC said in a note to clients.
Shares edged lower, tracking Asian stock markets as geopolitical concerns grew after the United States launched cruise missiles against an air base in Syria.
The broader NSE Nifty was down 0.21 percent at 9,242.20 as of 0643 GMT.
The benchmark BSE Sensex was 0.21 percent lower at 29,863.78.
Both indexes have gained around 0.8 percent on week, and are heading for a second consecutive weekly gain.
Telecom stocks Bharti Airtel and Idea Cellular rose as much as 2.53 and 3.35 percent respectively after rival Reliance Jio Infocomm, a unit of Reliance Industries, said the telecom regulator had asked it to withdraw a 3-month complementary offer to subscribers.
The Nifty Realty index rose as much as 1.14 percent to its highest in nearly two years.
India's central bank on Thursday said it has allowed banks to invest in real estate investment trusts (REITs) and infrastructure investment units (InvITs) within regulations prescribed by the capital markets regulator.
Sun Pharmaceutical Industries Ltd fell as much as 3 percent to its lowest since Feb 22 after the U.S. drug regulator found storage and logistics lapses during a surprise visit to Dadra facility, the Economic Times reported.
(Reporting by Tanvi Mehta in Bengaluru; Editing by Biju Dwarakanath)