MUMBAI (Dow Jones)--Indian government bonds traded higher Wednesday as the U.S. Federal Reserve remained cautious on a recovery in the world's largest economy, raising expectations central banks across the world may remain wary of raising rates too fast. The benchmark 7.80% 2020 bond closed at INR99.92, up from Tuesday's INR99.63. Late Tuesday, the Fed indicated it may leave rates low for longer than initially expected. The Fed also said it would reinvest the proceeds from expiring mortgage-backed securities into U.S. Treasurys, a sign that it feels the economy may need an extra boost for a longer period than expected. Local traders will meanwhile watch industrial output data, due Thursday, to gauge the strength of India's industrial growth. The industrial output growth is tipped to have slowed to 8.0% in June, according to a Dow Jones Newswires poll of 13 economists. It had risen 11.5% in May and 16.5% in April. A moderation in the pace of industrial recovery could mean the Indian central bank may also remain wary of hobbling the economic recovery by tightening its monetary policy too fast. Still, stubbornly firm prices may mean the Reserve Bank of India might not have the luxury of standing by while what begun as supply-side inflation spreads through the economy. Wholesale price-based inflation data for July, due next Monday, may hold the key to the central bank's future path. The RBI's INR120 billion debt sale Friday may test the market appetite for fixed-income instruments in a relatively tight liquidity environment. In the currency market, the Indian rupee slipped against the U.S. dollar, tracking weak local shares and low global risk appetite following the Fed's caution on the economic recovery. The dollar was at INR46.71 late Wednesday, up from INR46.40 late Tuesday. "The euro has weakened against the dollar over weak economic data lately. Risk sentiment may sour even more, supporting the dollar in coming sessions," said a trader at a private bank. Refunds of excess bids at a spate of recent share sales could also help reverse recent capital inflows, and boost the greenback. -By Bijou George, Dow Jones Newswires; +91-22-6145-6111; bijou.george@dowjones.com

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