* Property, bank stocks fall after India policy measures
* Long term bond yields down after RBI raises SLR
* Imminence of policy tightening to push yields up later
By Jeanette Rodrigues
MUMBAI, Oct 27 (Reuters) - Indian property and bank stocks fell swiftly on Tuesday after the central bank signalled its intent to raise interest rates soon and warned of asset bubbles and inflation.
India's real estate stock index fell almost 8 percent to a two-month low while banking stocks fell more than 3 percent, dragging the main index down 2 percent. The BSE index in turn was the worst performer in the MSCI Asia ex-Japan index.
At the same time, longer tenor Indian government bonds rallied, pushing yields down, after the Reserve Bank of India raised the proportion of deposits banks mandatorily have to invest in bonds.
In its quarterly monetary review, the RBI sharply revised up its inflation forecast for the end of March. It scrapped emergency funding for banks, sharply cut the support it gives banks for lending to exporters and asked them to set aside more funds against lending to the property industry.
"Banks will also have some pressure on their balance sheet because they will need to buy more bonds at lower rates," said Mahhendra Jajoo, head of fixed income at Tata Asset Management.
"We expect the markets to be rangebound. Today we are booking profits and will look to re-accumulate once the market settles down," Jajoo said, referring to the stock markets.
At 0947 GMT the main share index was down 2.4 percent at 16,336.02 points, after briefly trimming losses immediately after the policy news. For a story on the RBI's quarterly policy review, see
The 10-year benchmark bond yield was at 7.33 percent, after falling as low as 7.20 percent after the policy review. It had closed at 7.41 percent on Monday. There were fewer trades at the shorter end of the yield curve, but the curve flattened as short end yields also dipped.
The partially convertible rupee was at 46.97 per dollar after trimming losses to 46.778 after the policy and from previous close of 46.645/655.
The benchmark five-year interest rate swap was at 6.86/91 percent, little changed from its previous close of 6.86/90.
"The 10-year yield should hover around 7.20-30 percent in the coming months. But I see it around 7.50 percent by January-February, as by then inflation will be a serious concern," said Premanand Kamath, treasury head at Corporation Bank.
THE ROAD AHEAD
The RBI has in the past said that the trade-off between supporting growth and keeping a lid on inflation is a complex one for its policymaking.
"I think the central bank, in terms of cues, has probably already set its mind on hiking rates," said Ramya Suryanarayanan, an economist at DBS in Singapore.
"It wouldn't want to frame it in an extremely hawkish way because they wouldn't want to destabilise any market."
Industrial output expanded at its fastest pace in 22 months at 10.4 percent in August, signalling that rising consumer demand could fan inflation in the months ahead.
The central bank kept its economic growth projection of 6 percent with an upward bias for the fiscal year to March 2010, compared with a government advisory panel view of 6.5 percent.
Headline inflation rose at a faster-than-expected pace by mid-October to its highest in 20 weeks. The RBI surprised markets by raising its end-March wholesale price inflation projection to 6.5 percent from 5 percent previously.
In interest rate futures on the National Stock Exchange (NSE), the December contract implied a yield of 8.0162 percent on 10-year rates, below its previous close of 8.1040. The March contract was implying a yield of 8.2735 percent, lower than the previous close of 8.3790 percent. ($1=46.885/90 Indian rupees) (Editing by Vidya Ranganathan & Jan Dahinten)