India bond yields mixed; budget awaited

* India ups gasoline prices by 10 pct, diesel by 6.5 pct

* Fuel price hike may ease pressure on govt finances-traders

* Inflation not a concern in the near-term - traders

* WPI seen down 1.35 pct yr/yr, data due 0630 GMT (Updates to mid-morning)

MUMBAI, July 2 - Indian federal bond yields were mixed on Thursday as the inflation concerns from a rise in fuel prices were offset by hopes it would ease pressure on the country's strained fiscal deficit.

However, dealers awaited the budget on Monday for cues on the government's borrowing plan which would be crucial to determine the future course of the market.

India unexpectedly raised gasoline and diesel prices by as much as 10 percent on Wednesday, its first increase this year, passing some of oil's rally into an economy just beginning to find its feet amid a global recession.

At 10:20 a.m. (0450 GMT), the yield on the most traded 7.94 percent bond maturing in 2021 had dipped to 7.20 percent from Wednesday's close of 7.23 percent.

The benchmark 10-year bond registered just 5 deals at 6.98 percent, one basis point above its previous close.

Volumes were a moderate 42.40 billion rupees ($887 million) on the central bank's trading platform.

"The fuel price hike could put upward pressure on inflation but given the low level it is at, there is no concern in the short term but the move could ease the pressure on fiscal deficit in the near-term which is more comforting," said J Moses Harding, head of global markets, IndusInd Bank.

India controls the prices of widely consumed fuels to protect the poor, help contain inflation and analysts see the fuel hike as the government's move towards linking local fuel prices to that of international crude.

Pricing freedom would increase tax revenue and remove large subsidy bills, helping offset the cost of economic stimulus measures that have stretched public finances and put pressure on the fiscal deficit.

The government may increase its gross market borrowing to 3.95 trillion rupees for 2009/10 from its interim budget target of 3.62 trillion rupees, a Reuters poll showed.

"The market has already priced in a borrowing of up to 4 trillion rupees and bonds will react negatively to anything above that number," Harding said.

India's wholesale price index is forecast to have fallen 1.35 percent in the year to June 20, the third straight fall, according to a Reuters poll. The data is due at 0630 GMT. ($1 = 47.8 Indian Rupees)