* 10-yr bond yield trading at 7.90 pct
* Benchmark BSE index down 1.1 pct
* USD/INR at 54.33/34 from 54.1650/1750 prev close
(Updates with details, background, quotes)
MUMBAI, March 19 (Reuters) - Indian stocks and the rupee
fell to multi-week lows on Tuesday while the benchmark bond
yield hit a six-week high after a regional ally pulled out of
the ruling coalition, putting in doubt the fate of the
government's reform agenda.
Markets appeared to shrug off a decision by the Reserve Bank
of India to cut the benchmark policy rate by 25 basis points and
instead focused on its warning that the scope for further
monetary easing was limited.
How foreign investors react to the political and economic
uncertainties will be key, especially at a time when global
markets are under pressure from concerns sparked by a radical
bailout plan for Cyprus.
The benchmark index was down 1.1 percent after
earlier falling as much as 1.8 percent, the lowest since March
The rupee weakened to as much as 54.38 per dollar
from its 54.1650/1750 close on Monday, and was trading at
54.33/34 as of 0828 GMT.
The 10-year bond yield was trading at 7.90
percent, after swinging between a 6-week high of 7.93 basis
points to an earlier session low of 7.84 percent. The yield had
closed at 7.88 percent on Monday.
"The political development in India has taken centre stage
and will have a negative impact," said Sameer Rehman, vice
president of fixed income origination and syndication at TD
Securities in London.
The regional Dravida Munnetra Kazhagam (DMK) party withdrew
from the ruling coalition in protest against the government's
position on a United Nations resolution on war crimes carried
out during Sri Lanka's civil war.
That decision came at a time when markets were already flat
to weaker after the RBI said "the headroom for further monetary
easing remains quite limited" in its statement on Tuesday.
The words reinforced market expectations the RBI will only
cut interest rates by a further 25 or 50 bps in the new fiscal
year starting in April.
Whether foreign investors lose faith in Indian markets poses
a key risk, given their strong purchases of stocks and debt last
year helped contain the country's record current account
Investors had hoped a combination of fiscal and economic
reforms from the government, along with aggressive central bank
rate cuts, would boost an economy set to grow at a decade low of
around 5 percent in the fiscal year ending on March.
India faces the prospect of a downgrade into the so-called
"junk" debt from Standard & Poor's Ratings Services and Fitch
These domestic concerns are coming at a time when investors
are also growing concerned about foreign flows after Cyprus is
keeping risk assets under pressure.
Foreign investors bought a net of around $31 billion in debt
and FX markets last year, and around $12 billion so far this
year, which were critical to help narrow down a deficit that is
expected to widen to a record high in 2012/13.
"Because of the current account gap, we are reliant on
flows. If the flows get truncated, it would be difficult. But I
think it would be a knee-jerk reaction," said Sanjay Mathur,
head of economics research, Asia-Pacific ex-Japan for RBS in
(Reporting by Rafael Nam; Additional reporting by Archana
Narayanan, Shamik Paul and India markets; Editing by Sanjeev