* Indian rupee rises to its highest since Sept. 21
* India 10-year bond yield falls to lowest since Aug. 2
* Local elections, cenbank-govt rift to cap large gains - dealers (Updates to add details, background, quotes)
By Suvashree Choudhury
MUMBAI, Nov 14 (Reuters) - The Indian rupee and bonds gained in early trade on Wednesday, boosted by a fall in global oil prices and on the central bank's announcement a day earlier that it would buy bonds via open market operations.
At 0433 GMT, the rupee INR=D4 was at 72.12 to the dollar, its strongest since Sept. 21 and compared with 72.6750 on Tuesday, while the yield on the benchmark 10-year bond IN071728G=CC was at 7.72 percent, its lowest since Aug. 2. The paper had ended at 7.76 percent on Tuesday.
Dealers expect the rupee and bonds to be on a strong footing going ahead as oil prices remain soft and domestic inflation has been falling sharply.
"The domestic macro factors are working in favour of India after the fall in inflation and we expect foreign investors to come back to India bonds sooner than later with the rupee improving," said a dealer at a foreign bank.
India's headline annual consumer inflation fell to a 13-month low of 3.31 percent in October, below the central bank's medium term inflation target of 4 percent, spurring hopes of interest rates being kept on hold for the next few months.
However, the gains are likely to be capped in domestic markets ahead of state elections due in the next few weeks and a lack of clarity on the outcome of an ongoing rift between the central bank and the government, dealers said.
The RBI and the government have been embroiled in a war of words since end-October after Deputy Governor Viral Acharya called for greater operational autonomy for the central bank.
Top finance ministry officials have been piling pressure on the central bank to accede to their demands of easier lending rules, lower capital requirements and a higher share of RBI's reserves, all of which will be taken up at the central bank's board meeting on Monday. oil and inflation are important factors, we will also have to keep an eye on how much say does the government have on the central bank to understand how the outlook on growth and rates will shape up," said an analyst at a private bank.
Oil markets struggled to keep their footing on Wednesday after plunging 7 percent in the previous session, with surging supply and the spectre of faltering demand keeping investors on the edge. O/R
India imports more than two-thirds of its oil requirements and changes in oil prices have implications on its fiscal cost, current account deficit and inflation.
Separately, the RBI said on Tuesday it will buy 120 billion rupees ($1.65 billion) of government bonds on Thursday via open market operations. = 72.6100 Indian rupees) (Additional reporting Savio Shetty, Editing by Sherry Jacob-Phillips and Sunil Nair)