* 10-year yield rises 7 bps to 7.87 pct
* India to borrow gross 6.29 trln rupees in 2013/14, above estimates
* Govt to buy back 500 bln rupees of bonds next FY
* RBI deputy says will be able to manage borrowing (Adds RBI comments, closing levels)
By Subhadip Sircar
MUMBAI, Feb 28 (Reuters) - Indian government bonds had their worst day in seven months after the finance ministry on Thursday announced a gross market borrowing target that was well above expectations, dashing hopes of reduced debt supply.
Post market hours, data showed the economy slowed further in the December quarter, expanding 4.5 percent, as against a Reuters poll estimate of 5 percent, which should provide some support to bonds when trading resumes on Friday.
The government is planning to borrow 6.29 trillion rupees in the fiscal year starting April, higher than the 5.58 trillion rupees for the current fiscal year, according to the budget unveiled by Finance Minister P. Chidambaram.
That was higher than market expectations of 5.6-5.7 trillion rupees, disappointing investors who were also sceptical about a budget that proposes higher spending as well as increased taxes.
The budget also raised doubts about whether it would be enough to spur Reserve Bank of India to cut interest rates, given fiscal consolidation was seen as a key criteria to spur more monetary easing by the central bank.
"The market borrowing numbers are higher than our estimates, and it is negative for the market. There will be upward pressure on yields," said Nagaraj Kulkarni, South Asia senior rates strategist at Standard Chartered Bank in Singapore.
"However, interest rate cuts by the Reserve Bank of India need not be related to market borrowing. They will focus on the quality of the fiscal consolidation."
The benchmark 10-year bond yield ended 7 basis points (bps) higher from Wednesday's close of 7.87 percent, the single biggest daily rise in yield since July 31, 2012 when the central bank cut a key reserve ratio.
Earlier, the yield rose to as high as 7.88 percent, the highest yield since Feb. 12.
For the month, the yield fell 4 bps, a fourth month of fall.
The central bank, in response to the budget, said it would be able to manage the market borrowing.
"It sets the stage towards lowering the twin deficits," deputy governor Urjit Patel told reporters.
Yields had fallen 35 bps since Dec. 21 on expectations of the government's fiscal discipline and rate cuts from the central bank, prior to the budget day.
Net borrowing was also slightly higher than expected, with the government targeting 4.84 trillion rupees in 2013/14, above expectations for the government to keep it in line with this year's 4.67 trillion rupees.
Interest rate swaps also rose with the five-year OIS up 4 bps at 7.22 percent while the near-end one-year OIS rose 2 bps to 7.62 percent.
Dealers said the government announced a higher-than-expected gross borrowing target to accommodate a 500 billion rupee buyback programme. (Editing by Gopakumar Warrier and Anand Basu)