MUMBAI, July 18 (Reuters) - Indian government bond yields trended sideways in the early session on Thursday ahead of a fresh debt supply on Friday and with eyes on this year's budget to be tabled next week.
The benchmark 10-year yield was at 6.9649% as of 10:00 a.m. IST after closing at 6.9632% in the previous session. Indian markets were closed on Wednesday for a local holiday.
Volumes are expected to remain subdued after heightened activity on Tuesday as all other fundamental factors are largely similar, a trader with a state-run bank said. "The last auction before the budget also remained critical."
New Delhi aims to raise 310 billion rupees ($3.71 billion) through a sale of bonds, which includes 200 billion rupees of the benchmark note. The central bank will auction treasury bills worth 200 billion rupees later in the day.
Meanwhile, the federal government will announce the final budget for the current financial year on July 23, the key data points for fixed income market participants would be the fiscal deficit target and gross borrowing figure.
India has room to cut gross borrowing by 500-750 billion rupees following a better-than-estimated surplus transfer from the central bank and strong revenues, Neeraj Gambhir, head of treasury at Axis Bank said.
However, a Reuters poll found that the government remains committed to upholding pre-election targets, with median forecasts for the fiscal deficit target at 5.1% of gross domestic product and gross borrowing at 14.13 trillion rupees, the same as February's interim budget.
The 10-year U.S. yield stayed around a four-month low after top Federal Reserve officials cited progress in inflation easing closer to their 2% target, setting the stage for rate cuts.
The market now expects the Federal Reserve to start the rate easing cycle in September and has factored in 64 basis points of cuts in 2024, according to the CME FedWatch Tool.
Still, rising bets of Donald Trump winning the U.S. presidential race curbed a major fall in yields. ($1 = 83.5600 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Sohini Goswami)
