MUMBAI - Indian government bond yields fell for a second straight session on Thursday, tracking U.S. yields, as weak economic data in the world's largest economy prompted policy-pivot bets.

The benchmark 10-year yield ended at 7.3137%after closing lower at 7.3243% on Wednesday.

"The fall in U.S. yields has raised bets of rate cuts by the Federal Reserve and dovish moves by the Reserve Bank of India (RBI) in 2023, resulting in a fall in local bond notes," said Anuj Bhala, head of rates trading at SBM Bank (India).

U.S. yields dropped after data showed that retail sales in the United States fell more than expected in December, and as the Bank of Japan maintained its bond notes cap, reducing concerns of investors switching to Japanese bonds.

The 10-year U.S. yield eased to 3.32%, its lowest level in four months, as traders anticipated a start to the rate cut cycle in the last quarter of 2023.

Fed funds futures are now expecting the benchmark rate to top out at 4.87% in June, down from 4.90% ahead of Wednesday's data, with rates likely to fall to 4.34% in December.

India's five-year overnight indexed swap rate also crashed to its lowest level in the current fiscal on bets that a quicker policy pivot from the Federal Reserve could lead to a dovish turn by the RBI, analysts said.

The five-year overnight indexed swap rate dropped to 6.04% on Thursday, its lowest level since April 7, 2022, a time when the RBI had not even started raising policy rates.

Still, the fall in yields remained capped as investors waited for details ahead of the Union budget that will be tabled on Feb. 1, with focus on the government's fiscal consolidation path and its borrowing calendar for the next financial year.

Analysts at QuantEco Research expect the government to gross borrow 15.35 trillion rupees ($188.66 billion) for the next fiscal. Economist Vivek Kumar said the elevated size of gross borrowing could be a sentiment dampener considering the improvement in banks' credit appetite and narrowing of liquidity surplus. ($1 = 81.3650 Indian rupees)

(Reporting by Dharamraj Dhutia Editing by Sohini Goswami)