UPDATE 2-India finmin says wants cut in bank lending rates

(Adds bankers quotes and details)

By Unni Krishnan and Rajkumar Ray

NEW DELHI Jan 4 (Reuters) - India's finance minister said he wanted banks to cut lending and deposit rates by 50 basis points, knocking bond yields to 11-month lows on speculation of an interest rate cut at the central bank's policy review on Jan. 29.

State-run bank heads who met with the minister on Friday said interest rates were headed lower and the central bank could signal a move towards softer monetary policy later this month.

"I would like deposit, lending rates to come down by 50 basis points," Finance Minister Palaniappan Chidambaram told reporters after meeting the bank chiefs.

"If monetary policy is supportive, it is possible to look at stable, or perhaps some moderation," Chidambaram said.

"We look to moderate rates in the medium term."

The yield on the 10-year bond IN079917G=CC fell to 7.70 percent in afternoon trade, the lowest since Feb. 2007, following the comments, from 7.76 percent beforehand.

Banks raised interest rates by 200-250 basis points in 2007, after the Reserve Bank of India had raised rates five times since June 2006 and as it tightened banks' reserve requirements through the year, which limited the funds available for loans.

Bank lending has slowed, with credit growth moderating to an annual rate of 22.2 percent as at Dec. 7, down from rates of 30 percent earlier in 2007 and below the central bank's comfort zone of 24-25 percent for the 2007/08 fiscal year ending in March.

TIGHT POLICY OVER

State bank officials said the period of tight monetary policy was over, and interest rates were set to fall through 2008 as the finance minister wanted to stimulate demand and investment.

"I have to lower deposit rates and this will help lower lending rates. We will definitely be doing it. We have to catch up (on loans) in the Jan-March quarter," said H.A. Daruwalla, chairman of Central Bank of India (CBI.BO).

Chidambaram said there was a need to moderate lending to the real estate sector, and that banks needed to make more credit available for investment and consumption.

The central bank releases its policy review on Jan. 29. While the majority of analysts and traders expect no change in official rates, a section of the market is speculating on a rate cut due to softening inflation and following U.S. interest rate cuts.

"Inflation is low, liquidity is comfortable, there is no pressure in the system. If Reserve Bank of India softens (its) rate, there will be a clear signal to all of us," said Anil K. Khandelwal, chairman of Bank of Baroda (BOB.BO).

Annual wholesale price inflation was 3.50 percent as at Dec. 22, well below the central bank's comfort ceiling of 5.0 percent for the fiscal year ending in March 2008.

The central bank wants to condition inflation expectations in a 4-4.5 percent range, and has a medium term goal of lowering inflation to 3 percent. (Additional reporting by Rakesh Sharma) (Editing by John Mair)