India bond yields ease; food CPI remains elevated

* June consumer price inflation slows to 10.02 pct

* Risk aversion sets in after traders cite Merkel report on euro

* Most dealers expect the RBI to keep rates unchanged on July 31

By Subhadip Sircar

MUMBAI, July 18 (Reuters) - Indian federal bond yields fell on Wednesday as global oil prices eased and risk-off sentiment dominated, but a spike in retail food prices dimmed hopes of a near-term rate cut.

Risk aversion set in with the euro weakening after German Chancellor Angela Merkel was quoted in a media report casting doubts about the future of the European project.

Oil retreated slightly on Wednesday, snapping five days of gains as U.S. Federal Reserve Chairman Ben Bernanke offered few signs of further monetary stimulus and a gloomy view of the economy of the world's top oil consumer.

However, despite benign global factors, hopes of a rate cut remain muted as inflation worries dominate in India.

Annual consumer price inflation slowed slightly in June to 10.02 percent, but food prices rose over concerns about below-average monsoon rains.

Food inflation in CPI increased to 10.71 percent in June from 10.66 percent in May.

The spike in food prices, coming after RBI Governor Duvvuri Subbarao's comments that inflation remains "way above" comfort levels, will dash hopes of any rate cuts on July 31.

"While the decline, in line with the direction of WPI inflation, is a positive development, the absolute level remains in double digits and is too high for comfort," said Dariusz Kowalczyk, an economist with Credit Agricole CIB in Hong Kong.

"This makes it more difficult for the RBI to cut rates when it meets at the end of the month."

India's headline inflation, measured by the more popular wholesale price index (WPI), slowed to its lowest level in five months in June, data released on Monday showed.

The 10-year benchmark bond yield fell 2 basis points to 8.07 percent from its previous close.

The near-end overnight indexed swaps, however, rose as rate-cut hopes faded. The 1-year rate closed up 4 basis points at 7.61 percent.

The 5-year ended down 2 basis points at 6.88 percent. (Editing by Anand Basu)