INDIA BONDS-Bond yields seen little changed ahead of debt supply

MUMBAI, Jan 20 (Reuters) - Indian government bond yields are expected to be largely unchanged in early trades on Friday, as market participants await a fresh supply of debt via weekly auction later in the day.

The benchmark 10-year yield could move in a range of 7.29%-7.33% till the debt auction, a trader with a private bank said. The yield ended lower at 7.3137% on Thursday, the second consecutive session of fall.

We saw some reversal in positions by the end of the session yesterday, despite a sharp drop in U.S. yields, they said and added that the market is preparing to absorb the fresh supply.

The central government aims to raise at least 280 billion Indian rupees ($3.45 billion) through the sale of bonds, which includes 120 billion rupees of the benchmark paper.

Bond yields ended lower on Thursday, tracking a crash in U.S. yields that fell after weak economic data raised bets that the Federal Reserve will have to begin the rate-cut cycle in the last quarter of 2023.

India's five-year overnight indexed swap rate also crashed to its lowest level in the current fiscal on bets that a quicker policy pivot from the Federal Reserve could lead to a dovish turn by the RBI, analysts said.

The five-year overnight indexed swap rate dropped to 6.04% on Thursday, its lowest level since April 7, 2022, a time when the RBI had not even started raising policy rates.

Traders in India are focussed on the federal budget that will be tabled on Feb. 1, with the attention on the government's fiscal consolidation path and its borrowing calendar for the next fiscal.

ICICI Securities Primary Dealership expects the government to gross borrow 16.50 trillion rupees, after conducting a 400-billion-rupee swap of securities maturing in the next financial year with the Reserve Bank of India. KEY INDICATORS: ** Brent crude futures up 0.6% at $86.65 per barrel, after rising 1.4% in previous session ** 10-year U.S. Treasury yield at 3.4042% and the two-year note at 4.1412% ** India to sell federal government bonds worth 280 billion rupees ** RBI to set underwriting fees for 280 billion rupees weekly bond auction ($1 = 81.2400 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Janane Venkatraman)