* Lower-than-expected headline WPI raises hope of rate cut
* 10-yr bond yield falls to lowest since April 2011
* 5-yr OIS rate drops to lowest level this year
* Not all analysts see RBI cutting rates on July 31
By Archana Narayanan
MUMBAI, July 16 (Reuters) - Indian 10-year benchmark bond yield dropped to a 15-month low on Monday after lower-than-expected headline inflation raised hopes the central bank would cut interest rates this month, though not all analysts were convinced.
Bond markets had already started pricing in the prospect of monetary easing last week after India revised its April industrial production to a contraction of 0.9 percent from its previous estimate of 0.1 percent growth.
However, the views of a rate cut were not uniform. Core inflation in June, which the Reserve Bank of India is believed to closely track, held steady from levels in May.
Weaker-than-expected rainfalls so far in the monsoon season are also raising worries about a hike in food prices, while potential policy reforms, including a hike in diesel prices, would help sentiment but also raise inflationary concerns.
After the markets close, Reserve Bank of India reiterated headline as well as consumer price inflation is way above the central bank's comfort level, which is believed to stand at around 4.5 percent to 5 percent.
"I do not expect this number to prompt the RBI to immediately cut rates," said Shubhada Rao, chief economist at Yes Bank in Mumbai.
"The inflation expectation still remains elevated, and the outlook is cautious because of the performance of monsoon, and its impact on food prices, as well as the impending and much awaited hike in fuel prices."
India's 10-year benchmark bond yield, introduced in June, fell 5 basis points to 8.05 percent from its previous close, after touching a session low of 8.01 percent.
That was the lowest level for a benchmark 10-year bond since mid-April 2011.
The reaction was more pronounced in overnight index swap rates: the five-year rate slid 10 bps to 6.87 percent, its lowest level since Dec. 20.
India's one-year overnight index swap rate dropped 9 bps to 7.51 percent, a level last seen on June 14.
The falls came after India said wholesale price index rose a lower-than-expected 7.25 percent in June from a year earlier, adding to pressure on the central bank to cut interest rates to help revive slowing growth.
"The core and headline inflation are seen trending down. So long as the core data remains under 5 percent it provides room for a rate cut. The headline inflation slowing has amplified rate cut probability," said Manish Wadhawan, director and head of interest rates at HSBC India.
The RBI has kept the repo rate on hold since easing by an aggressive 50 basis points at its April review.
However, the central bank officials have reiterated their concerns about inflationary pressures, including last month when the RBI disappointed markets by keeping the repo rate on hold, and have yet to signal a change in thinking, traders also warned. (Editing by Rafael Nam)