INDIA BONDS-Bond yields seen rising on heavy state debt sale, budget stays key

MUMBAI, Jan 23 (Reuters) - Indian government bond yields were expected to open marginally higher on Monday ahead of a heavy state debt supply this week, while sentiment remained cautious ahead of the Union budget announcement due on Feb. 1.

The benchmark 10-year yield could move in the 7.32%-7.37% range, a trader with a private bank said. The yield ended higher at 7.3478% on Friday and rose five basis points last week.

"While the market was expecting states to borrow less than half of their planned quantum, they have come out with a very heavy borrowing plan for the week which will weigh on the sentiment," the trader added.

Indian states aim to raise 256.50 billion rupees ($3.17 billion) through the sale of bonds on Tuesday. Although the quantum stays below the planned 302 billion rupees, it is the highest in three months.

Though there are chances states may not borrow the full amount, the announcement could have a negative impact, especially after weak demand at the central government bond auction on Friday, the trader said.

New Delhi raised 280 billion rupees through the sale of bonds on Friday, which included the benchmark paper that was sold at a weaker-than-estimated cutoff price.

Traders will also focus on the federal budget that will be tabled next week, with the government's fiscal consolidation path and its borrowing calendar for the fiscal year 2024 set to be the next market-moving trigger.

Most foreign banks expect gross supply in the range of 15.50 trillion rupees to 16.80 trillion rupees, with estimates from Barclays and Goldman Sachs on the higher side.

Meanwhile, oil prices were buoyed by prospects of an improvement in demand from the world's largest importer China. The benchmark Brent crude contract gained 2.7% last week, after rising 8.5% in the previous week. KEY INDICATORS: ** Brent crude futures down 0.4% at $87.30 per barrel, after rising 2.75% last week ** 10-year U.S. Treasury yield at 3.4714% and the two-year note at 4.1681% ($1 = 80.9790 Indian rupees) (Reporting by Dharamraj Dhutia Editing by)