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Indian government bond yields are expected to trend lower in early session on Wednesday, tracking U.S. peers, even as market participants await the Reserve Bank of India's monetary policy decision.

The 10-year benchmark 7.26% 2032 bond yield is expected to be in the 7.28-7.33% range on Wednesday after closing at 7.3142% on Monday. India's financial markets were shut on Tuesday.

There could be some initial slide in yields at the open, in step with the U.S. Treasuries, but any major fall may be unlikely, the trader said. "The policy decision as well as the guidance is the key driver, along with start of the auction cycle," the trader added.

U.S. yields dropped on Tuesday after job openings in February dropped to the lowest level in nearly two years, implying that the labour market is finally cooling and could allow the Federal Reserve to loosen its grip on monetary policy.

The two-year yield has dropped over 20 basis points in last two sessions, while the 10-year yield eased by 15 bps, with over 50% probability that the Federal Reserve may keep interest rate unchanged in its meeting early next month.

Focus remains on the RBI's monetary policy decision due on Thursday, when the central bank is expected to raise the interest rate by 25 basis points. The central bank had raised the repo rate by 250 bps to 6.50% in the previous financial year.

The benchmark bond yield is expected to trade in the 7.25-7.50% range for the next three months, and even if the RBI hikes the rate, the market might not react negatively as that move is already priced in. Market will react on the guidance, said Marzban Irani, chief investment officer for fixed income at LIC Mutual Fund.

"We were expecting strong rate hikes, but of late, the views have changed, and final rate hikes are being delivered, and with a fall in U.S. yields, Indian bond yield should also ease."

Traders will also be keenly tracking the movement in oil prices, especially after the OPEC+ announced additional production cut.

KEY INDICATORS:

** Brent crude futures contract was up 0.5% at $85.40 per barrel after staying unchanged in previous session

** 10-year U.S. Treasury yield was at 3.3554% and two-year note was at 3.8603% ** RBI to auction Treasury Bills worth 320 billion rupees ($3.90 billion)

** Indian states to raise 30 billion rupees via bond sale

($1 = 82.0900 Indian rupees)