MUMBAI, Aug 17 (Reuters) - Indian government bond yields declined, with the benchmark 10-year yield crashing 10 basis points on Wednesday, tracking a sharp fall in global oil prices that could further lower the inflation trajectory.

The benchmark 10-year government bond yield was at 7.1966% as of 0455 GMT. It had fallen to 7.1947% earlier in the day, after closing at 7.2894% on Friday. Indian fixed income markets were shut on Monday and Tuesday for holidays.

"The sharp fall in oil prices is a major relief as far as local inflation scenario is concerned, and hence there is a sharp rally in bond prices, even as July reading was largely along estimates," a trader with a state-run bank said.

Global oil prices dropped, with the benchmark Brent crude contract declining to its lowest level in six months on Tuesday, as weak U.S. economic data spurred concerns about a potential global recession.

The crude contract ended at $92.34 per barrel on Tuesday, closer to a level last seen before Russia invaded Ukraine, after having fallen by over 7% in three sessions to Tuesday. Investors awaited clarity on talks to revive the 2015 Iran nuclear deal.

India's consumer inflation dipped to 6.71% in July, easing for the third month in a row, helped by a slower increase in food and fuel prices. The figure, published on Friday, was marginally lower than the 6.78% forecast by economists in a Reuters poll.

The reading stayed above the central bank's upper tolerance range for a seventh consecutive month and is expected to remain elevated in the near term, necessitating more rate hikes in the coming months, analysts said.

India imports bulk of its crude oil requirement and falling oil prices could lead to lower inflation.

Market sentiment is likely supported by the central government's announcement of a new 10-year bond sale this week. New Delhi will conduct the sale of bonds for 330 billion rupees ($4.16 billion)on Friday. The auction includes a new 10-year bond, which will replace the existing benchmark note in coming months.

The new 10-year bond is expected to draw strong investor demand and realign the entire yield curve, analysts said. ($1 = 79.3300 Indian rupees) (Reporting by Dharamraj Lalit Dhutia Editing by)