The yield on the 10-year bond ended at 8.89%, off an intraday low of 8.87%, which was its lowest since August 12. It had ended at 8.97% on Monday.
Volumes were heavy at Rs 8,800 crore on the central bank's trading platform.
I see the potential for the 10-year yield to go down to 8.75% this week, only if crude slides more, said Anoop Verma, associate VP at Development Credit Bank.
Oil traded below $115 a barrel on Tuesday, well below its record peak above $147 in mid-July, and a sustained fall would ease pressure on the government to raise state-set fuel prices.
An increase in retail prices of petrol, diesel and cooking gas in early June pushed inflation into double digits. Annual inflation was at 12.63% on August 9, its highest since annual numbers in the current series became available in 1995.
Traders also awaited cash inflows of about Rs 15,000 crore from bond redemptions this week, which are expected to raise the appetite for bonds.
The central bank has kept a tight leash on liquidity in recent weeks to cool demand in the economy and reduce inflationary pressures.
Meanwhile, call money rate ended steady today, after slipping to an intraday low of 7%, as demand picked up in late trade, dealers said.
The one-day call money rate ended at 9-9.20%, compared with Monday's close of 9-9.15%.
CBLOs ended at a weighted average rate of 8.95%, compared with 8.89%.
Call rate rose in late trade with some banks stepping up their borrowings to meet sudden outflows.
Also, banks had borrowed less from Reserve Bank of India's repo tender, despite tight liquidity, noting the fall in call money rate. As a result, such banks had to step up borrowings.
Banks borrowed only Rs 5,500 crore from the central bank's repo tender, compared with Rs 20,200 crore on Monday.
Demand rose in late trade, as banks covered less from RBIs repo tender today, said a dealer at a private bank.
Intraday, call rate had slipped to a low of 7% because of low demand as most banks had met their reserve needs in the first week of Reporting Fortnight.
Banks which over-borrowed last week, were willing to lend surplus funds today at a lower rate, said a dealer at a state-run bank.