By Suvashree Choudhury and Arnab Paul
MUMBAI (Reuters) - The rupee and stocks weakened early on Thursday, tracking Asian peers after the U.S. Federal Reserve gave a 2019 rate outlook that traders called "less dovish" than they expected.
Government bonds also fell, halting a two-day advance after India's monetary policy committee sounded hawkish in minutes released on Wednesday of its Dec. 5. meeting.
The rupee was at 70.44 to the dollar in morning trade after opening at 70.68 and weaker than Wednesday's close of 70.39. The 10-year benchmark bond yield was at 7.25 percent from the previous close of 7.22 percent.
"The Fed sounded less dovish and went ahead with the rate hike," said a chief forex dealer at a large state-run bank.
"There could be capital outflows from India after the Fed's statement."
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Some dealers expected the Fed to see only one more hike in its guidance for 2019, rather than two.
After weeks of market volatility and calls by President Donald Trump for the Federal Reserve to stop raising interest rates, the U.S. central bank did it again, and stuck by a plan to keep withdrawing support from an economy it views as strong.
Markets are expected to be volatile during the day with the rupee seen in a range of 70.55-70.90 to the dollar while bonds are likely to move in a 5-basis-point range, traders said.
The broader NSE index was down 0.70 percent at 10,890.7 as of 0539 GMT, dragged by financials such as Housing Development Finance Corp Ltd, which was down 1.7 percent. The benchmark BSE index was 0.68 percent lower at 36,237.17.
Billionaire Mukesh Ambani-owned index heavyweight Reliance Industries Ltd was trading 1.6 percent lower.
Through Wednesday both indexes had risen for seven straight sessions, with the NSE index clocking its best rally since a nine-day streak in April.
"Markets are disappointed because they had expected a more dovish statement from the Fed but there hasn't been a major deviation from what the Fed had said earlier," said Dhananjay Sinha, head-institutional research, Emkay Global Financial Services.
"Domestically, politics will override everything for the next six months. There could be ultra-populist measures like Goods and Services Tax (GST) cuts and farm loan waivers which would be credit negative."
"In the medium term, we expect the NSE index to be range-bound between 10,400 - 11,000."
India will tax most goods at below 18 percent in a further simplification of GST, Prime Minister Narendra Modi said on Wednesday, as his ruling Bharatiya Janata Party is looking to consolidate its voter base among the middle class and businesses ahead of a tough national election next summer.
India's monetary policy committee sounded cautious on inflation and preferred to wait for more data to see for how long price pressure and growth momentum would remain soft, according to minutes of its Dec. 5 meeting.
Bond traders also booked profits after the sharp rally earlier this week, following soft oil prices and easing inflation.
(Reporting by Suvashree Dey Choudhury in MUMBAI and Arnab Paul in BENGALURU; Editing by Richard Borsuk and Jacqueline Wong)