India bond yields hit 4-½ yr low on rates, fuel

* 10-year bond yield hits 5.25 pct, lowest since May 2004

* Traders expect central bank to lower rates further

* Hopes of a local fuel price cut rise (Updates to close)

MUMBAI, Dec 30 (Reuters) - Indian federal bond yields tumbled to their lowest since May 2004 on Tuesday as expectations grew the central bank would cut rates, while speculation of a reduction in fuel prices lifted sentiment for debt.

The benchmark 10-year bond yield IN082418G=CC closed at 5.27 percent after touching an intraday low of 5.25 percent, its lowest since May 2004. It had closed at 5.55 percent on Monday.

At the day’s trough, the 10-year bond yield had fallen 182 basis points this month.

Volumes were heavy at 159.60 billion rupees ($3.3 billion) on the central bank’s trading platform.

“There is a strong rumour of a 50 to 100 basis point cut each in the repo and reverse repo rates, which could come in before the central bank’s January policy meet,” said Bekxy Kuriakose, head of fixed income at DBS Chola Mutual Fund.

“The 10-year bond yield could touch 5 percent levels within a month,” she added.

The Reserve Bank of India has slashed rates since mid-October, and its main lending rate, the repo, now stands at 6.5 percent, while the reverse repo rate, at which it absorbs cash from the market, is at 5 percent.

Dealers said rate cut hopes were strengthened after the central bank governor met Prime Minister Manmohan Singh on Monday, raising expectations of more monetary and fiscal measures to bolster growth in a slowing economy. [ID:nBOM353085]

The central bank reviews monetary policy on Jan. 27.

Traders said they expect local fuel price cuts soon after newspapers quoted the oil minister, Murli Deora, as saying the government was considering such a reduction.

Lower fuel prices, a major component of the wholesale price index, would result in a further fall in inflation, giving the central bank more scope to cut rates.

Many analysts estimate inflation, which has been falling sharply in recent weeks, to continue its slide and reach about 2 percent by March.

Traders were awaiting fiscal deficit data, due on Wednesday, for cues on the government’s borrowing plans up to the end of the 2008/09 fiscal year in March. ($1 = 48.5 rupees) (Reporting by Neha D’silva, Editing by Mark Williams)