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"I was under the impression that once an XMP is associated with a raw file which is in the Lr catalog, Lr should pick-up the XMP data and make the requisite adjustments to the photo, but it does not."
LR doesn't do this automatically -- when the metadata stored in the .xmp sidecar (or, for non-raws, in the photo file itself) has been modified since the it was last imported into the catalog, you need to give the command Metadata > Read Metadata From File to tell LR to read the new metadata into the catalog.
The metadata status indicator in the upper-right of a thumbnail changes to indicate that the on-disk metadata is newer than what's in the catalog:

You can use the Metadata Status column of the Library Filter bar's Metadata browser to find all such photos:

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