MUMBAI - Indian government bond yields ended higher on Tuesday as local retail inflation stayed above the central bank's target, cementing bets of another hike in policy rates next month.

Higher state debt sale added to supply, while rise in the 10-year U.S. yield also weighed.

The 10-year benchmark 7.26% 2032 bond yield ended at 7.3841%, after closing lower at 7.3579% on Monday.

"Local bonds are completely tracking the movement in U.S. yields," said Raju Sharma, head of fixed income at IDBI Mutual Fund.

If U.S. inflation stays elevated, the Federal Reserve may opt for a rate hike next week, and a similar action should be seen by the Reserve Bank of India (RBI), Sharma added.

India's retail inflation was at 6.44% in February and remained above the central bank's target for the second month. Core inflation also stayed above 6%, according to economists.

The RBI has raised the repo rate by 250 basis points in this financial year to 6.50%. The next policy decision is due on April 6.

"We continue to expect a repo rate hike of 25 bps in the April policy, with further actions being data dependent," Kotak Mahindra Bank said.

Meanwhile, Indian states raised 325.70 billion rupees ($3.95 billion) through the sale of bonds during the day, which was over 60 billion rupees more than the planned outlay. The cutoff yields were slightly higher than estimates.

U.S. yields stayed volatile through the session, with the 10-year yield dropping to 3.46% earlier in the day, and then jumping to 3.63%. Traders are awaiting U.S. inflation data due later in the day.

The Fed funds futures are now pricing in an over 75% chance for a 25-bps hike in March, and 25% for status quo. The odds for a 50-bps hike had risen to 68% last week.

($1 = 82.5030 Indian rupees)

(Reporting by Dharamraj Dhutia; Editing by Sohini Goswami)