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

MUMBAI, Jan 3 (Reuters) - Indian government bond yields are expected to be largely unchanged on Tuesday, with the focus being on the first weekly auction of state debt after they revealed a higher-than-expected borrowing plan for January-March.

The benchmark 10-year yield is likely to move in a 7.32%-7.36% range, a trader with a private bank said. The yield ended at 7.3398% on Monday — its highest since Nov. 10.

"Till we do not find any major trigger, market dynamics would continue to be dominated by demand-supply dynamics," the trader said.

Indian states plan to raise 134.96 billion rupees ($1.63 billion) through bond sales later in the day. This is a part of their planned borrowing of 3.41 trillion rupees for the current quarter, which is sharply higher than market expectations of 2.70 trillion rupees to 3.00 trillion rupees.

The rise in government bond yields, however, has largely been capped as states borrowed far lesser than planned in the first three quarters of the financial year. They borrowed 4.57 trillion rupees between April and December, lower than the scheduled 6.55 trillion rupees.

The larger state borrowing programme comes as market participants keenly await the federal budget announcement to gauge the borrowing plan for the next financial year.

The benchmark bond yield is expected to remain in the range of 7.30%-7.40%% in the current month, Dipanwita Mazumdar, an economist with Bank of Baroda, said.

"Much fluctuation towards the long end of the yield curve is unlikely. Even short-end yield is unlikely to exhibit much volatility, and soon with the clarity in government's borrowing program for FY24, we might see some correction in the yield curve. We expect fiscal deficit as a percentage of the GDP to be slightly lower at ~6% in FY24."

Meanwhile, the 10-year U.S. yield continued to stay around 3.85%, while the benchmark Brent crude contract was around $85 per barrel. KEY INDICATORS: ** Brent crude futures down 1% at $85.05 per barrel, after rising 10.5% in 2022 ** 10-year U.S. Treasury yield was at 3.8464% and the two-year note at 4.4590% ** Seven Indian states to raise 134.96 billion rupees through the sale of bonds ($1 = 82.7450 Indian rupees) (Reporting by Dharamraj Dhutia; editing by Uttaresh.V)