MUMBAI: Indian government bond yields fell in early trade on Monday, ahead of expected inflows after domestic bonds are included in JPMorgan's emerging market debt index later this week.

India's benchmark 10-year yield was at 6.9560% as of 10:26 a.m. IST, following its previous close of 6.9723%.

"The 10-year yield is likely to trade in a narrow range with a downward bias as this is a crucial index inclusion week," a trader at a primary dealership said.

Domestic bonds will be included in the index on June 28.

Inflows into domestic bonds under the Fully Accessible Route crossed the $10 billion mark last week since the inclusion was announced in September.

Foreign banks also stepped up purchases of bonds last week ahead of the inclusion, and is expected to continue this week as well.

Meanwhile, U.S. Treasury yields were largely unchanged on Friday after a strong business activity report indicated that the Federal Reserve has more reason to hold off interest rate cuts.

The 10-year U.S. yield was steady at 4.2515% during Asian hours on Monday.

Fed funds futures now suggest the probability of a U.S. rate cut in September is 66%, a tad more than before the report was released on Friday, with traders pricing in one to two cuts of 25 basis points (bps) each this year.

Back in India, the central bank's rate-setting panel has diverged further in its views on the need for high interest rates to tame inflation, with some fearing economic growth is being sacrificed, according to minutes from the June monetary policy meeting.

"Strong growth conditions have provided Reserve Bank of India (RBI) policy space to remain on pause till there is further clarity on food inflation risks," said Gaura Sen Gupta, chief economist at IDFC First Bank.

"The earliest RBI can cut interest rates is in October. By this period there will be greater clarity on food inflation risks with monsoon completed. Moreover, there will also be more clarity on the Fed policy." (Reporting by Bhakti Tambe; Editing by Sonia Cheema)