By Dharamraj Dhutia MUMBAI, Oct 1 (Reuters) – Indian government bond yields are expected to be little changed in early deals at the start of the fiscal second half, as traders await cues from the central bank's monetary policy decision and guidance. The yield on the 10-year benchmark note is expected to move between 6.56% and 6.58% on Wednesday, till the policy decision at 10:00 a.m. IST, a trader at a private bank said. It closed at 6.5770% on Tuesday. "Dovish commentary with hints of two more rate cuts would be the best outcome for bonds, instead of a rate cut and neutral commentary, which does not convince the bond market about future action," the trader said. A majority of respondents in a Reuters poll expect the Reserve Bank of India to leave its key rates unchanged, although recently there have been growing calls for a 25-basis-point cut. Some economists say a surprise cut cannot be ruled out as the RBI may weigh the impact of U.S. trade tariffs and subdued inflation. Large firms such as Citi, State Bank of India, Capital Economics and Barclays have shifted to the rate cut camp over the last two weeks and joined Nomura and MUFG, who had already predicted the reduction. The RBI has cut rates by 100 basis points since the start of the year, but financial conditions tightened after the August policy meeting, when the central bank held rates and retained a neutral stance. India will also auction a fresh 10-year government bond on Friday to raise 320 billion rupees ($3.60 billion). This comes after New Delhi raised the share of the 10-year bond in its October-March borrowing plan. RATES India's overnight index swaps (OIS) are expected to see thin trading activity till the policy decision. The one-year OIS rate ended at 5.4550% on Tuesday, while the two-year OIS rate ended at 5.4525%. The liquid five-year OIS rate settled at 5.75%. KEY INDICATORS: ** Benchmark Brent crude futures fell 1.3% to $66.15 per barrel, after easing 1.4% in the previous session ** Ten-year U.S. Treasury yield was at 4.1503%; two-year yield at 3.6083% ** RBI will auction treasury bills worth 190 billion rupees ** RBI to conduct 2-day variable rate repo for 1 trillion rupees ($1 = 88.8030 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Eileen Soreng)
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