Jan. 12 (Bloomberg) -- Indian bonds rose the most since September 2001 on speculation the government will cut gasoline and diesel prices, helping ease inflation further from a 10- month low.

Benchmark 10-year securities rebounded after their record weekly drop pushed yields to the highest in almost a month, luring buyers including banks and securities companies. The benchmark stock index dropped a third day and the rupee slid the most in three weeks. Bonds pared gains after a government report today showed industrial production rose in November, belying forecasts for a second monthly contraction in output.

“The rise in yields last week was too rapid and they are adjusting accordingly now,” Kumar Nathani, manages equivalent of about $25 million of debt at Taurus Asset Management Co. in Mumbai. “The bias is going to remain for yields to decline.”

The yield on the benchmark 8.24 percent note due April 2018 fell 41 basis points to 5.79 percent at the 5:30 p.m. close in Mumbai, according to the central bank’s trading system. The price rose 3.15 rupees per 100-rupee face amount to 117.40. A basis point is 0.01 percentage point.

The government may cut the prices of gasoline, diesel and liquefied petroleum gas in a few days, CNBC-TV18 reported on Jan. 10, citing Oil Minister Murli Deora. Gasoline prices may be reduced by 5 rupees (10 U.S. cents) a liter and diesel by 3 rupees, the television channel reported.

Crude oil prices in New York have plunged 73 percent since touching a record high of $147.27 a barrel in July.

The drop in commodity prices may provide room for the central bank to slash interest rates as it seeks to bolster an economy estimated to expand at the slowest pace since 2003.

Slowing Growth

Growth may slow to 7 percent in the year ending March 31, Foreign Minister Pranab Mukherjee said today, compared with 9 percent or more in the previous three years.

The Reserve Bank of India reduced its benchmark overnight lending rate four times in less than three months to the lowest since it was introduced in 2000. It also cut the rate at which it drains excess cash from the banking system to a record low.

The government on its part unveiled two stimulus packages within a month, and said debt sales will increase to fund additional spending. It sold 150 billion rupees ($3.1 billion) of bonds last week, 50 billion rupees more than initially scheduled.

The extra supply drove up the 10-year yield 1.12 percentage points last week, the biggest increase since at least 1998, according to data compiled by Bloomberg.

The government is working on further measures to boost growth in some industries, Trade Minister Kamal Nath said today.

Further Measures

Industry representatives will meet government officials on Jan. 21 to discuss further stimulus measures, Nath said. The minister said he hoped November’s unexpected industrial expansion was evidence of a trend.

Output at factories, utilities and mines rose 2.4 percent in November from a year earlier, after a 0.4 percent decline in October, the government said today in New Delhi. Economists in a Bloomberg News survey expected a 0.85 percent contraction.

India’s passenger-car sales declined 7 percent in December as a slowing economy eroded demand. Sales last month fell to 82,105 vehicles from 88,272 a year earlier, the Society of Indian Automobile Manufacturers said today. Full-year sales rose 2 percent to 1.2 million units, according to data compiled by Bloomberg. Car sales in India have fallen in five of the past six months.

“Concerns over growth are mounting and it will require further measures before the underlying sentiment is assuaged,” said Srinivasa Raghavan, head of treasury at IDBI Gilts Ltd., a primary dealer that underwrites government debt sales in Mumbai. “With that being priced in, fixed-income securities are a better investment opportunity.”

The yield may drop to 5.5 percent this week, Raghavan said.

The cost of five-year swaps, or derivative contracts used to guard against rate fluctuations, fell. The rate, a fixed payment made to receive floating rates, dropped to 4.79 percent from 4.94 percent on Jan. 9.

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

Last Updated: January 12, 2009 07:14 EST