By Dharamraj Lalit Dhutia

MUMBAI (Reuters) - Indian government bond yields ended marginally lower on Thursday, after local retail inflation reading came in largely in line with expectations, while focus shifts to U.S. reading due later in the day.

The benchmark Indian government bond yield ended at 7.4217%, after closing at 7.4348% on Wednesday.

"Currently, both domestic and external factors support continued front-loading of rate hikes by the RBI," said Gaura Sen Gupta, an economist with IDFC First Bank.

"In case the (U.S.) Federal Reserve hikes policy rates by 75bps in November, then a 50 bps hike by RBI would be more likely in December."

India's annual retail inflation accelerated to a five-month high of 7.41% in September led by a surge in food prices. The reading was marginally above a Reuters' forecast of 7.3%, and well beyond the Reserve Bank of India's 2%-6% target for three straight quarters.

The data also implies that the central bank will now have to report to the government why it failed to meet the target and what actions it will need to take.

India's consumer price-led inflation is expected to gradually decelerate from hereon, on the back of a fall in commodity prices and easing food inflation, analysts said.

Market participants are now looking for retail inflation data in the U.S., which could provide more clarity on the Fed's interest rate trajectory. The Fed has already raised rates by 300 bps since March and is expected to increase another 75 bps next month.

Easing oil prices also lifted sentiment, after the benchmark Brent crude contract fell nearly 6% in last three sessions to$92.95 per barrel. The falling prices will have a direct impact on India's inflation as it is one of the largest importers of the commodity.

India's benchmark bond is currently "better placed" than securities of other tenors, R. Sivakumar, the head of fixed income at Axis Mutual Fund said, indicating the central bank could soon reach the terminal rate in the current cycle.

"That should (over months) act as a brake on inflation and support the currency. So I am not very bearish on bonds now," Sivakumar said.

(Reporting by Dharamraj Lalit Dhutia; Editing by Dhanya Ann Thoppil)