INDIA BONDS-Bond yields dip, tracking plunge in U.S. peers; RBI policy awaited

MUMBAI, Sept 29 (Reuters) - Indian government bond yields slipped in early trading on Thursday as U.S. yields plummeted, though any sharp moves are likely to be restricted ahead of the Reserve Bank of India's policy decision due on Friday.

The benchmark Indian 10-year government bond yield was at 7.3016% as of 0435 GMT after ending at 7.3340% on Wednesday.

"The initial reaction is tracking U.S. Treasury moves, but we should see limited moves for rest of the session," a trader with a private bank said.

U.S. yields nosedived after the Bank of England launched an emergency bond buying plan to restore financial stability in markets that were shocked by the new British government's fiscal policy plans.

The 10-year U.S. yield eased as much as 32 basis points on Wednesday, after hitting 4.02% earlier in the day for the first time since April 2010. It was last at 3.75%.

However, the focus domestically is shifting to the RBI's policy outcome, with many market participants expecting the central bank to raise interest rate by 50 basis points for a third consecutive time on Friday.

The RBI has already raised rates by 140 basis points between May and August to tackle inflation that has stayed above its tolerance level for eight straight months through August.

Market focus would also remain on any commentary over the prevailing banking system liquidity, which slipped into deficit earlier this month and has oscillated between surplus and deficit since then.

Traders also await the Indian government's borrowing calendar for October-March, likely to be detailed over the next few days. Analysts expect the market to absorb the bond supplies for the rest of this fiscal year, although at higher yields.

The government is scheduled to borrow a gross 5.86 trillion Indian rupees ($71.71 billion) in October-March, which could increase by another 160 billion rupees after New Delhi failed to raise the planned amount from the sale of floating rate securities earlier. ($1 = 81.7200 Indian rupees) (Reporting by Dharamraj Lalit Dhutia; Editing by Savio D'Souza)