Indian bond yields at 3-yr lows on rate cut hopes

* China rate cut raises expectations of policy move

* Inflation expected to have edged lower (Updates to close)

By Anurag Joshi

MUMBAI, Nov 26 (Reuters) - Indian federal bond yields dived to three-year lows on Wednesday after China's rate cuts spurred expectations the central bank would soon follow suit, encouraged by forecasts of a further dip in inflation.

The benchmark 10-year bond yield INR082418G=CC ended at 7.09 percent, its lowest since Dec. 2005 and 13 basis points below Tuesday's close of 7.22 percent. Volume was a heavy 12.3 billion rupees ($2.5 billion).

China slashed interest rates on Wednesday for the fourth time since mid-September, stepping up the pace of monetary easing to cushion the blow of the global financial turmoil on the world's fourth-largest economy. [ID:nLQ528921]

"The fall in bond yields continued after China cut its rates. More and more people are convinced about the 10-year reaching 7 percent because of the expectation of a local rate cut and lower inflation," Anoop Verma, associate vice president at Development Credit Bank, said.

Since early October, India's central bank has aggressively cut its main lending rate by 150 basis points to 7.5 percent and banks' cash reserve requirements by 350 basis points to 5.5 percent to shore up growth in a faltering economy.

High borrowing costs have dented domestic demand and struggling overseas economies have trimmed export growth.

A Reuters poll forecast on Wednesday that India's economy probably grew an annual 7.3 percent in the July-September quarter INGDPQ=ECI, robust by world standards but its slowest pace in nearly four years. [ID:nDEL156200]

Traders expect inflation INWPI=ECI to have eased to a seven-month low of 8.56 percent in mid November, from with 8.90 percent a week earlier. [ID:nBOM371996] ($1 = 49.4 rupees) (Editing by Mark Williams)