The bond yields snapped a two day fall on Tuesday as traders wary of possible central bank measures to drain cash from the banking system at its month-end policy review booked profits.

The yield on the benchmark 10-year bond ended at 7.77%, higher than 7.75% on Monday, when it hit a 5-1/2-month low of 7.71% during trade. “Though expectations are that the Reserve bank of India would leave rates unchanged in the policy, it is not likely to remain quiet about excess cash,” a trader at a foreign bank said.

Traders expect the RBI to remove a daily Rs 3000 crore cap on reverse repurchase auctions to absorb more cash. Analysts say that could lift overnight rates from near 10-year lows.

The overnight call rates ended at 0.20-0.30%, near a 10-year low of 0.10% hit in June and way below the central bank’s short-term lending rate of 7.75%. The RBI through its liquidity adjustment facility saw an offer of Rs 113900 crore for absorption under the reverse repo auction from the banking system while it conducted no repo auction on Tuesday.

The rupee raced to a nine-year high on Tuesday as robust capital inflows hit the market, though dealers said RBI bought dollars through the day in a bid to stem the rise. The rupee ended at 40.2750/2850 per dollar, after hitting a high of 40.20 in early trade, its strongest since May 1998. The rupee ended at 40.2950/3050 on Monday.

“The flows continue to be strong, which the market has noted, but the central bank was mopping up the dollars as best they can,” said a senior dealer with a private bank.

Capital inflows have been robust, with a large proportion going into the stock market, which hit its 14th record high in 17 sessions on Tuesday.

The rupee also gained support as the dollar slipped to a two-month trough against the yen and near a record low against the euro as worries about economic impact of the troubles in the US subprime mortgage market weighed.

Still, traders remained cautious about building large positions in the rupee as the central bank is widely suspected of dollar-buying intervention recently.

In the forward market, the six month forward premium ended higher at 0.96% from its previous close at 0.65% while the twelve month premium also moved up to 1.29% from 1.13% earlier.