Jan. 24 (Bloomberg) -- Indian government bonds pared losses on speculation a faster pace of reduction in interest rates by the U.S. Federal Reserve will prompt India's central bank to lower local borrowing costs soon.

The yield on the security maturing in 2017 fell yesterday to the lowest since December 2006 after the Fed's surprise cut this week. Reserve Bank of India Governor Yaga Venugopal Reddy will meet with fellow policy makers on Jan. 29 to decide on interest rates after keeping the benchmark unchanged at a five- year high since March.

``The expectation now is that the Fed is not over with its rate cuts, which means more pressure on the central bank here to follow suit,'' said Rajesh Babu, a bond trader at state-owned Andhra Bank in Mumbai. ``A further rally may see yields continuing to decline.''

The yield on the 7.99 percent note due July 2017 was little changed at 7.40 percent as of 11:16 a.m. in Mumbai versus yesterday's close of 7.39, according to the central bank's trading system. It rose as high as 7.41 percent today. The price declined 0.05, or 5 paise, per 100-rupee face amount, to 103.95.

Futures contracts on the Chicago Board of Trade show a 100 percent chance the Fed will cut the target rate for overnight lending between banks by at least 50 basis points to 3 percent at its Jan. 30 meeting.

Tumbling stocks, a U.S. housing slump and credit-market losses stemming from defaulted subprime mortgages led the Fed to make an emergency interest-rate cut on Jan. 22.

Credit Crisis

The turmoil was worse than expected and India's central bank will consider the impact of the credit crisis at its meeting later this month, Reddy said Jan. 21.

``The global financial uncertainties weren't entirely unanticipated but, yes, the intensity wasn't predicted nor was the duration expected,'' he said. ``The outlook seems to be far more uncertain than before for global growth.''

Reddy has increased the repurchase rate six times to 7.75 percent since the beginning of 2006 to curb inflation in an economy forecast by the government to grow at least 9 percent for a third straight year.

To contact the reporters on this story: Anoop Agrawal in Mumbai at Aagrawal8@bloomberg.net.

Last Updated: January 24, 2008 01:00 EST