MUMBAI, Sept 30 (Reuters) - Indian government bond yields were higher in early trades on Friday, as expectations of a rate hike and fears of a hawkish commentary from the Reserve Bank of India, prompted some selling.

The benchmark Indian 10-year government bond yield was at 7.3563% as of 0410 GMT after closing at 7.3405% on Thursday.

"Rate action of 50 basis points will not hurt much, but there are fears that they (RBI) may have to provide a hawkish guidance, as globally things are very negative, and hence there is some position cutting," a trader with a state-run bank said.

A majority of market participants are expecting the central bank to raise its key interest rate by 50 basis points for a third consecutive time when the decision is announced at 0430 GMT.

The RBI has already raised rates by 140 basis points between May and August to 5.40%, to tackle inflation that has stayed above the central bank's tolerance level for eight straight months through August.

Meanwhile, global index provider FTSE Russell said, India will be retained on the watch list for a potential upgrade to Market Accessibility Level ‘1’ and for consideration toward inclusion in the FTSE Emerging Markets Government Bond Index (EMGBI).

DBS Bank said the reaction in bonds may be modest to this development and a more consequential index decision would be JPMorgan's announcement.

However, the foreign bank said "FTSE Russell outcome reduces the likelihood that India would be added to GBI-EM, as it suggests that there have not been sufficient progress on overcoming operational hurdles."

Given the expectations around index inclusion, bonds fended off a significant reaction to the recent spike in U.S. yields. A recent Reuters report, however, said a decision may only happen next year.

The underlying sentiment also got a lift after India cut its gross borrowing to 14.21 trillion Indian rupees ($174.26 billion) from 14.31 trillion rupees for 2022/23, and aims to borrow 5.92 trillion rupees during October-March.

Supplies during October-March would also include 160 billion rupees of green bonds. ($1 = 81.5425 Indian rupees) (Reporting by Dharamraj Lalit Dhutia; Editing by Neha Arora)