Bonds dropped for a second day on speculation that some investors are selling part of their holdings before a debt auction due later this week.
The yield on the 6.90% note due July 2019 climbed six basis points to 6.92% at the close. The rupee rose 1.1%, the most since May 29, to 48.1975 a dollar at the close.
The rupee rose the most in almost two months on speculation gains in local stocks will attract more funds into the region as corporate earnings improve and a global recession eases.
The yield on the benchmark notes maturing in 2019 rose as the government last week increased its borrowing target for the first half of the fiscal year that started April 1 by 24% to Rs 2.99 trn. India has scheduled 10 auctions starting July 24 to raise the remaining Rs 1.1 trn, according to the central bank.
?I expect a gradual rise in yields because accommodating the supply will be a bit difficult,? said Radhavi Bhide, a fixed-income trader at Kotak Mahindra Bank.
The federal government plans to sell Rs 12,000 crore of securities on July 24.
India?s interest rates may rise as increased expenditure by the government helps the economy rebound, according to Murthy Nuni, managing director of Marshal Fund Partners Pte.
The cost of five-year swaps, or derivative contracts used to guard against rate fluctuations, climbed. The rate, a fixed payment made to receive floating rates, increased to 6.36% from 6.20% on July 17. The money market rates remained easy tracking surplus liquidity in the system.