The 10-year bond yield ended at 9.32%, eight basis points below the previous close. It had risen to an intra-day peak of 9.54% on Tuesday, one basis point short of a seven-year high hit earlier this month.
Volumes stood at Rs 4,000 crore on the central bank's trading platform.
"Crude has come down, so that has provided some hope about inflation not spiraling out of control," a trader with a foreign bank said.
Oil hit a 12-week trough of $120.42 in the previous session, its lowest since May 6. Lower global oil rates ease pressure on the government to raise state-set fuel prices.
A 10-percent hike in prices of diesel and petrol in early June pushed inflation to 13-year highs.
Traders said sentiment remained cautious after the central bank raised its key lending rate and cash reserve ratio by 50 basis points to 9% on Tuesday. Central Bank Governor Yaga Venugopal Reddy said on Tuesday inflation would remain around current levels for the next few months, barring global shocks. Meanwhile, the rupee climbed as stronger stock markets and higher interest rates raised expectations of renewed capital inflows, but dollar buying by oil refiners trimmed gains.
Sentiment was also helped by oil's fall to 12-week lows on Tuesday, as it is India's biggest import.
But the central banks announcement on Tuesday of an end to a scheme of providing foreign exchange directly to oil refiners in exchange for special government-issued bonds curtailed the optimism, as refiners are the biggest buyers of dollars in the local market.
It ended at 42.36/37 per dollar, 0.7% above Tuesday's close of 42.64/65.
"There was some selling by exporters and that has supported the rupee, but it looks like it should settle in a broad 41.50-42.50 band," said Puneet Sharma, chief trader of foreign exchange at state-run Allahabad Bank.
One-month offshore non-deliverable forward contracts were quoting at 42.58/42.63, weaker than the onshore rate.
The stock market rose 3.6% on Wednesday, buoyed by strong world stocks after oil prices fell.
Capital outflows have eroded a key support for the rupee, with foreign funds selling more than $6.8 billion worth of stocks so far in 2008, helping pulling the rupee down 7%.