MUMBAI: Indian government bond yields are likely to trend higher in early deals on Friday, as investors await fresh supply of debt and the central bank highlighting inflation concerns weighed on sentiment.

The benchmark 10-year government bond yield is likely to trade in a 7.21%-7.27% band until a government debt auction later in the day, a trader with a private bank said. The yield rose 6 basis points on Thursday to end at 7.2421%.

"As feared, the RBI highlighted inflation concerns, further justifying yesterday's rapid upmove in bond yields," the trader said. "The cutoff yield for the new 10-year note will be the driving factor for the day."

The central government will sell bonds worth 330 billion rupees ($4.14 billion) and the auction includes 130 billion rupees of the new 10-year note, which will replace the existing benchmark bond in coming weeks. The 10-year bond is expected to witness strong demand from investors.

Lakshmi Iyer, chief investment officer for debt and head products at Kotak Mutual Fund, expects the yield on the new 10-year bond to be 5-6 basis points lower than prevailing 10-year bond yields, which are likely to move in a range of 10-15 basis points from current levels.

Meanwhile, the Reserve Bank of India said on Thursday that inflation might still require a monetary policy response going forward as it remained above the target range despite easing in recent months.

"Inflation has edged down, but its persistence at elevated levels warrants appropriate policy responses to anchor expectations going forward," the central bank said in an article on the state of the economy, published in its monthly bulletin.

India's retail inflation dipped to 6.71% in July, easing for the third month in a row, and missing the 6.78% print forecast by economists in a Reuters poll.

Brent futures ended higher for a second straight session on Thursday after a larger-than-expected drawdown in U.S. crude stocks more than offset worries over a global economic slowdown. The contract gained more than 4.5% in the two sessions to end at $96.59 per barrel on Thursday.

India imports bulk of its crude oil requirement and rising oil prices could lead to higher inflation. KEY INDICATORS: ** Brent crude futures down 0.1% at $96.45 per barrel ** Ten-year U.S. note yield at 2.8950% ** RBI to set underwriting fees for 330 billion rupees weekly bond auction ** India to sell federal government bonds worth 330 billion rupees ($1 = 79.7500 Indian rupees) (Reporting by Dharamraj Lalit Dhutia; Editing by Subhranshu Sahu)