MUMBAI - Indian government bond yields fell on Monday tracking a plunge in U.S. yields, as investors scaled back expectations of an aggressive rate hike by the Federal Reserve this month.

Local bond markets also awaited domestic retail inflation data due later in the day.

The 10-year benchmark 7.26% 2032 bond yield ended at 7.3579%, lowest since Feb. 16, after closing at 7.4321% on Friday. The yield posted its biggest single-session drop since Oct. 4.

"Inflation data in India as well as in the United States will be crucial given the global market turmoil over the failure of SVB (Silicon Valley Bank) and the uncertainty on the contagion impact of its failure," said Puneet Pal, head of fixed income at PGIM India Mutual Fund.

The 10-year U.S. Treasury yield fell 22 basis points on Friday and dropped 14 bps more, and was at 3.5487%.

Yield on the two-year bond fell 31 bps on Friday and was down 39 bps on Monday trading at 4.1926%.

Goldman Sachs said the Fed would not raise rates next week at all, capping the rally in U.S. bond prices.

The Fed Fund futures have assigned a 56% probability for a 25-bps hike next week, with a 44% probability of a status quo. The odds for a 50-bps hike had risen to 68% last week after the Fed Chair's remarks.

Meanwhile, a Reuters poll showed retail inflation in India likely eased to 6.35% last month but stayed above the Reserve Bank of India's (RBI) upper tolerance limit for a second straight month. Inflation in January stood at 6.52%.

The RBI is likely to increase repo rate by 25 bps in April to 6.75%, after raising the same by 250 bps in this financial year.

"Markets have already discounted another 25 bps of rate hike in the next MPC meeting and we expect the 10-year benchmark bond yield to keep trading in a range of 7.30% to 7.50% till the fiscal year-end," Pal added.

(Reporting by Bhakti Tambe; Editing by Sohini Goswami)