Mumbai, Dec. 14: The Indian currency and bond prices rallied today, buoyed by indications that the US Federal Reserve’s 18-month-long credit tightening programme might be nearing an end.

While the rupee rose by 35 paise to hit a one-month closing high of 45.74 per dollar, bonds rallied by 10-15 paise across the board. Analysts said the rally was triggered by the Federal Open Markets Committee’s (FOMC) meeting on Tuesday.

Although the Federal Reserve raised the short-term interest rates by a quarter percentage point to 4.25 per cent yesterday, the committee has ceased to describe the monetary policy “accommodative”. This is seen as a pause signal to the rate-hike cycle.

“So far, the FOMC has been describing the interest rate as accommodative. However, the change in the nuance did not come as a surprise as the market has been expecting it,” said S.P. Prabhu, head, fixed-income research at IDBI Capital.

The FOMC had hinted at such a development at its November meeting when the statement described the policy as accommodative.

At the meeting, some members had expressed caution over continuing with the tightening process for long.

“This was the first official indication that the Fed was approaching a neutral policy stance,” Prabhu said.

He added that while a couple of more rate hikes are likely in early 2006, the Fed funds rate is expected to settle at around 4.50-5 per cent level by the middle of 2006.

Given this signal, a weak dollar and strong inflows from foreign institutional investors, led the rupee to pierce key resistance levels.

Unwinding of long dollar positions by banks on the back of FII inflows into the booming equity markets also helped the rupee surge despite the rising crude oil prices, dealers said.

Sensex drops

The sensex today adjusted to a downward correction as it succumbed to profit selling and ended in the negative terrain for the first time in six sessions, registering a modest loss of 22 points at 9,241.76.

Local funds availed of the opportunity to book profits at the current lucrative levels.

The Bombay Stock Exchange benchmark 30-share index hit an all-time intra-day high of 9309.01 during early trade, but failed to maintain the momentum due to heavy profit booking by investors.