(Updates at market open)

By Khushi Malhotra

MUMBAI, Jan 12 (Reuters) - Indian government bonds

gained early on Monday as traders welcomed a lower-than-expected

supply in this week's state debt sale, easing fears of a supply

glut following a record borrowing plan ‌for the quarter.

The benchmark 10-year 6.48% 2035 bond yield was

at 6.6263% as of ​10:07 a.m. IST, versus 6.6401% at Friday's

close.

Bond yields move inversely ‍to prices.

States are set to raise 268.15 billion ⁠rupees ($2.97

billion) at ⁠Tuesday's auction, below the 362 billion rupees

previously scheduled, offering near-term relief on supply.

"Lower-than-expected SDL (state ‌development loan) supply at

this week's ​auction has lifted sentiment," a primary dealer

said, adding that it still may not be enough to pull ⁠the 10-year

yield below 6.60%.

The benchmark ‍10-year yield ​has drifted higher about 5 basis

points since the start of the year, as investors question demand

for heavy supply in ‍the final quarter of the fiscal year, with

the central and

state

governments slated to raise a record 8 trillion rupees via

bond sales.

The Reserve Bank of India's consistent liquidity injections have

also failed to cheer traders as the banking system's cash

surplus hovers near neutral ​levels.

The ‍RBI has bought 2 trillion rupees of bonds since

December to boost liquidity. It will further buy bonds worth ​500

billion rupees later in the day and conduct a $10 billion

foreign-exchange swap on Tuesday.

Traders also remain cautious as the deepening

feud

between the U.S. Federal Reserve and President Donald Trump

may stoke further uncertainty.

RATES

India's longer-duration overnight index swap rates fell on

Monday tracking lower US Treasury and Indian government bond

yields.

The one-year ​OIS was flat at 5.49%, while the

two-year OIS rate fell about 2 bps to 5.57%. The liquid

five-year OIS rate dipped 1.25 bps to 5.94%

($1 = 90.2330 ‍Indian rupees)