The bond yields eased on Thursday as traders used ample cash supplies to build new positions ahead of the central bank?s policy review next week, when official interest rates are expected to be held steady.

The yield on the benchmark 10-year bond ended at 7.80%, down from Wednesday’s close of 7.82%.

It is still up nine basis points from a 5-? month low of 7.71% hit on Monday. The Reserve Bank of India (RBI) is widely expected to leave rates unchanged at its July 31 policy review.

?In the second half, inflation could rise again but is likely to stay below the RBI target of 5%,? ABN AMRO Bank said in a research note.

?Traders are positioning for an extended pause in policy rates and expect the rise in bond prices to continue after the policy,? a foreign bank trader said.

Overnight rates ended at 0.15-0.20% on Thursday, close to a 10-year low of 0.10% hit in June and way below the RBI’s short-term lending rate of 7.75%.

The RBI through its liquidity adjustment facility saw an offer of over Rs 1 lakh crore for absorption under the reverse repo auction from the banking system while it conducted no repo auction on Thursday.

The rupee clung to gains from strong foreign investment flows on Thursday, but came under pressure after some overseas investors trimmed holdings in the local unit on concerns about holding risky assets, dealers said.

The rupee ended at 40.3400/3450 per dollar, a touch stronger than the previous close of 40.3500/3575 and slightly closer to a nine-year high of 40.20 hit earlier this week.

?There was very strong two-way interest today, a lot of action in a relatively tight range,? said a dealer with a foreign bank. Dealers said foreign direct investment from a company to the tune of about $300 million hit the market and that at least three foreign banks were seen selling dollars aggressively.

Global equities fell on Thursday on concerns over rising oil prices, deterioration in housing and a worse climate for deal financing, hurting sentiment for the rupee.

In the forward market, the six month forward premium ended lower at 0.96% from its previous close at 1.14% while the twelve month premium also moved down to 1.30% from 1.41% earlier.