By Dharamraj Dhutia MUMBAI, Oct 3 (Reuters) – Indian government bond yields declined in early deals on Friday, with the 10-year benchmark bond yield hovering around the crucial 6.50% mark as the market awaited the auction of a new 10-year security for further directional cues. The yield on the 10-year benchmark note was at 6.5078% as of 10:15 a.m. IST, after ending at 6.5166% on Wednesday. Indian debt markets were shut on Thursday for a public holiday. India will auction a fresh 10-year government bond later in the day to raise 320 billion rupees ($3.61 billion). This comes after New Delhi raised the share of the 10-year bond in its October-March borrowing plan. "A new 10-year paper right up at the start of the quarter would set the tone for overall demand-supply dynamics, and it is crucial that the cutoff comes below 6.50%," trader with a primary dealership said. Bond yields declined in the previous session after the Reserve Bank of India kept its policy rate unchanged at 5.50% as expected, but said that low inflation had opened up policy space for supporting growth. The central bank raised its economic growth forecast for the financial year by 30 basis points to 6.8% and reduced its inflation forecast by 50 basis points to 2.6%. RBI Governor Sanjay Malhotra said ongoing tariff and trade policy uncertainties will affect external demand. Most market participants now expect a rate cut in December, after a pause in August and October. The RBI has cut rates by 100 basis points since the start of the year. RATES India's overnight index swaps (OIS) eased on Friday, as market became more comfortable with the idea of a rate cut in December. The one-year OIS rate was at 5.4150%, while the two-year OIS rate was at 5.3950%. The five-year OIS rate was trading 5.6550%. ($1 = 88.7500 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Janane Venkatraman)
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