Yields on Indian government bonds are likely to ease this week aided by easy money, but dips will be muted due to looming issuance by the federal and state governments and concerns about inflation, traders said.

The central bank will start an on-tap sale of loans worth 70 billion rupees ($1.47 billion) issued by Indian state governments on May 12. State governments have the option to retain up to 30 per cent of the over subscriptions.

This will be followed by federal government issuances for 50 billion rupees between May 14 to 20, according to the central bank calendar for market borrowings.

The benchmark 10-year bond ended Saturday at 5.9420 per cent up from the previous week's close of 5.8945 per cent.

"Yields should nudge down for most part of the week helped by liquidity," said Sanjeet Singh, debt analyst at ICICI Securities and Finance Co. "But with such huge bond issues slated in the next few weeks, most investors will tend to be cautious."

The government bond yield curve steepened last week after the central bank said it will keep a close eye on inflation, which is hovering at around six per cent for the first time in two years.

It also cautioned that sizeable rate cuts were unlikely due to low real or inflation-adjusted rates of interest. The central bank last week cut the key bank rate to a 32-year low of six per cent to give a boost to a nascent industrial recovery.

The bank rate was at eight per cent in July 2000 and analysts fear the three-year easing cycle might be nearing an end.