Indian bond yields drop as borrowing concerns ebb

* Monday's budget may cut subsidy, push asset sales - traders

* Could reduce government's borrowing needs - traders

* Ample cash conditions also help bond prices

By Neha D'silva

MUMBAI, July 3 - Indian federal bond yields slipped on Friday, fuelled by hopes the government will probably announce lower-than-expected borrowing in the updated budget on Monday.

Dealers said an increase in state-set fuel prices this week and an economic survey released on Thursday pointed to the government's efforts to improve its finances and reduce its widening fiscal deficit, which was at 6.2 percent in 2008/09.

The government is likely to cut subsidies in the budget and an expected thrust on asset sales could limit its borrowing needs, they said.

The yield on the most traded 7.94 percent bond maturing in 2021 <IN079421G=CC> ended at 7.02 percent, below Thursday's closing of 7.12 percent.

The yield on the benchmark 10-year bond <IN060519AG=CC>, which registered only 54 deals, closed at 6.83 percent, below its previous closing of 6.87 percent.

The benchmark bond is down 16 basis points this week. It had risen 31 basis points in June.

Volumes were heavy at 144.05 billion rupees on the central bank's trading platform.

"At every point there are buyers as the market is expecting the borrowing amount to be lower than earlier expectations," said Srinivasa Raghavan, treasury head at IDBI Gilts.

"The ample cash conditions are also an important factor in the rally," he said.

The government has so far sold 1.62 trillion rupees of bonds of the 3.62 trillion rupees it had planned for 2009/10. A Reuters poll earlier this week forecast the government would set a borrowing target of 3.95 trillion rupees in its budget. [ID:nBOM402323]

Oil traded below $67 a barrel on Friday, after a fall of nearly 4 percent in the previous session, pressured by a stronger dollar and investor concern about the economic outlook and energy demand. [O/R]