India bonds yields fall to near one-month low as government cuts borrowing

MUMBAI (Reuters) - Indian bonds rallied on Tuesday, with yields falling to the lowest levels in nearly a month, after the government reduced the amount of bond sales in January and February after a recent surge in inflows into a government-run deposits scheme.

The government will sell 660 billion rupees ($9.69 billion)in debt in January and February, the central bank said in a statement on Monday, or 180 billion rupees less than previously budgeted.

The reduced borrowing had been expected after the government's move in November to ban 500 and 1,000 rupee notes sparked a surge in those bills into postal office deposits, swelling state coffers just as New Delhi gears up to announce its annual budget sometime in February.

The 10-year benchmark bond yield fell 6 basis points to 6.34 percent. It had dropped to 6.29 percent earlier in the day, its lowest since Dec. 7.

The 10-year bond yield had already fallen 11 bps on Monday as traders covered short positions on the first trading day of 2017.

"The borrowing cut decision shows that the government is serious about its fiscal discipline path, which is a good news for upcoming budget," said a trader at a foreign bank.

Traders added bond markets would soon turn their focus on the Reserve Bank of India's next policy review in Feb. 7.

Bond markets had been hit in December after the RBI unexpectedly kept interest rates on hold, despite fears that the ban on banknotes would severely dent economic growth after it sparked big cash shortages.

But the RBI instead opted for caution, saying the impact from India's cash move may prove transitory.

Traders say whether the RBI will cut rates will depend on the government's budget for the next fiscal year, expected sometime during the first few days in February.

Traders say a disciplined budget that keeps spending under control could ease the RBI's fears about inflaton and raise the prospect of additional rate cuts.

($1 = 68.0900 Indian rupees)

(Reporting by Suvashree Dey Choudhury; Editing by Kim Coghill)