Nov. 3 (Bloomberg) -- India's bonds dropped, snapping a three-day rally, after the central bank lowered the amount lenders need to invest in government debt.

The benchmark 10-year yield rose after the Reserve Bank of India on Nov. 1 told commercial banks that they now need to keep at least 24 percent of their deposits in the form of low-risk securities approved by the regulator, reducing the so-called statutory liquidity ratio from 25 percent earlier. The central bank decided to cut the proportion to free up cash in the banking system after the overnight lending rate reached a 19- month high last week.

``The measure has given investors an opportunity to shed debt that may be a drag on their portfolio,'' said Srinivasa Raghavan, head of treasury in Mumbai at IDBI Gilts Ltd., a primary dealer that underwrites government debt sales. ``Yields may rise a bit.''

The yield on the 8.24 percent note maturing in April 2018 climbed 6 basis points, or 0.06 percentage point, to 7.56 percent at the 5:30 p.m. close in Mumbai, according to the central bank's trading system. The price fell 0.43, or 43 paise per 100-rupee face amount, to 104.54.

The decline in bond prices was tempered after the central bank on Nov. 1 also unexpectedly cut its benchmark interest rate for a second time in two weeks and announced measures to boost cash in the financial system.

Repurchase Rate

The Reserve Bank cut its overnight lending rate, or the repurchase rate, by a half-percentage point to 7.5 percent. That was after reductions in borrowing costs last week spanning from Beijing to Washington to ease a global credit crunch. The central bank lowered the amount lenders need to set aside to cover deposits for a fourth time in as many weeks.

``Investors didn't anticipate the depth of the crisis and it was time to take wholesome measures rather than piecemeal steps,'' said Parthasarathi Mukherjee, treasurer at Axis Bank Ltd. in Mumbai. ``We will see a steep slide in yields.''

The Reserve Bank reduced the amount of deposits that lenders need to set aside as reserves to 5.5 percent from 6.5 percent. The four cuts in the so-called cash reserve ratio by 3.5 percentage points that started Oct. 11 will add 1.4 trillion rupees ($28.8 billion) to banks.

The rate at which banks lend to each other overnight slid to 7.25 percent today from 19.5 percent on Oct. 31, according to data compiled by Bloomberg.

``The bout of liquidity tightness was unnerving which clearly indicated that the steps taken earlier were not enough,'' Mukherjee said.

The cost of five-year interest-rate swaps, or derivative contracts used to guard against rate fluctuations, rose. The rate, a fixed payment made to receive floating rates, was at 6.615 percent, compared with 6.57 percent on Oct. 31.

To contact the reporter on this story: Anoop Agrawal in Mumbai at aagrawal8@bloomberg.net.

Last Updated: November 3, 2008 07:15 EST