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By V. Ramakrishnan

MUMBAI, March 12 (Reuters) - Indian federal bonds yields dropped to their lowest in a week on Wednesday, after the central bank announced moves to help ease tightening of cash conditions due to tax payments and holidays this month.

A sharp slowdown in industrial output growth in January also raised expectations of a rate cut in coming months even though inflation is rising.

The 10-year federal bond yield <IN079917G=CC> ended at 7.54 percent, its lowest close since March 3, and below Tuesday's close of 7.60 percent.

"The sentiment improved after the central bank's announcement," a dealer with a private sector bank said. "The fall in industrial output growth has also rekindled hopes of a rate cut although it is too soon to expect one."

The central bank said on Wednesday it would hold additional repo and reverse repo auctions on March 14 and an extra repo auction on March 17.

Companies have to pay their final instalment of advance tax for 2007/08 by the middle of this month and JP Morgan estimated the outflow at about 600 billion rupees ($14.9 billion).

Data on Wednesday showed industrial output in January grew 5.3 percent from a year earlier, well below both economists' forecast in a Reuters poll of 8.0 percent and the previous month's upwardly revised annual rate of 7.7 percent.

The central bank has kept its key lending rate at 7.75 percent for nearly a year, after raising it five times between June 2006 and March 2007. ($1=40.3 rupees) (Editing by Ranjit Gangadharan) (([email protected]; Tel: +91 22 6636 9039; Reuters Messaging: [email protected])) Keywords: MARKETS INDIA MONEY