MUMBAI, Jan 2 (Reuters) - Indian government bond yields are expected to be relatively unchanged in the second trading session of the New Year, with traders awaiting the first state debt sale of the quarter bringing heavy supply to the market.

The 10-year benchmark bond yield is expected to drift in the 7.17%-7.21% range on Tuesday following its closing at 7.1969% in the first session of 2024, a trader with a private bank said.

"As we move back into normal action from holiday mode, it would be interesting to see the demand for state bonds today, after the heavy borrowing schedule for the quarter, which shocked the markets," the trader said.

Indian states aim to raise 160 billion rupees ($1.92 billion) through a sale of bonds later in the day, which could be the smallest auction in terms of quantum for the quarter.

States aim to raise a record 4.13 trillion rupees through the sale of bonds in January-March, exceeding every market estimate and weighing on investor appetite.

Bond yields had risen on Monday following the announcement of the calendar after market hours on Friday.

As the days progress, market participants will likely be keen to react to factors like purchases from foreign investors as well as state-run banks, both of which are expected to be among the buyers this month.

While state-run lenders made large purchases in the last week of 2023 and foreign investment notched a remarkable jump in the last three months of 2023, inflows reached a six-year high.

Traders also anticipate the bond yield curve to "bull steepen" this year on expected interest rate cuts from the U.S. and Indian central banks. Bull steepening occurs when the yields on shorter-maturity bonds fall faster than the longer-end.

Meanwhile, the 10-year U.S. yield remained in the critical 3.85%-3.90% range in Asian hours, as investors anticipate the Federal Reserve to cut rates from as early as March.

KEY INDICATORS:

** Brent crude futures 1.3% higher at $78 per barrel, after easing 1.7% in previous session

** 10-year U.S. Treasury yield at 3.8809%, two-year yield at 4.2540%

** Six states to raise 160 billion rupees via sale of bonds ($1 = 83.2170 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Dhanya Ann Thoppil)