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indian-bond-MUMBAI: India's benchmark 10-year bond yields rose to a one-month high after the central bank cut the proportion of government debt and other securities that lenders must hold, while also raising its inflation outlook, casting doubts about future rate cuts.

As widely expected, the Reserve Bank of India kept the country's main lending rate at 8.00 percent, though it surprised markets by lowering the statutory liquidity ratio to 23 percent from 24 percent.

The SLR mandates the proportion of deposits that banks must hold in approved securities such as gold, cash, and government bonds. The cut is expected to improve liquidity, though its broader impact would likely be muted, analysts said.

Instead, the more lasting consequence could come after it raised its wholesale price index inflation projection to 7 percent in the year ending in March 2013, from 6.5 percent.

"The cut in banks' statutory liquidity ratio doesn't make a difference. Credit growth has not picked up because rates are higher for corporates, and banks have asset quality issues," said A. Prasanna, a senior economist at ICICI Securities Primary Dealership.

"At present, it doesn't look as if the RBI is in a position to cut rates. However, there is enough room in the second half of the year for a 50 basis points cut, but the timing is difficult to determine."

Overnight indexed swaps surged, with the benchmark 5-year OIS rate up 10 bps to 7.10 percent from its previous close, while the 1-year rate rose 5 bps to 7.69 percent.

The benchmark 10-year bond yield rose to as high as 8.28 percent from its 8.15 percent close on Monday, marking the highest yield for a 10-year bond since July 2.

 However, the yield was last trading at 8.22 percent, as traders were at least comforted after the RBI said managing liquidity remains an objective, and will respond to pressures including by purchasing bonds through open market operations.

Liquidity conditions have eased noticeably this month, with repo borrowings from banks repeatedly coming in within the RBI's comfort zone.

The central bank conducted its last OMO in late June.  "With a cut in bank's statutory liquidity ratio announced, we expect the RBI will now do more open market operations to support the huge government borrowing," said Sujan Hajra, chief economist at Anand Rathi Securities.

Copyright Reuters, 2012

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