The 10-year bonds gained after the Reserve Bank of India (RBI) said it will offer to buy back existing debt at an auction on Thursday.
The RBI on Wednesday said it will purchase as much as Rs 6,000 crore of securities as it helps the government to raise a record Rs 4.51 lakh crore this fiscal year ending March 31.
?The central bank?s move is supportive of bonds and should lead to a further drop in yields,? said Devendra Das, a fixed- income trader at Development Credit Bank. ?It widens the scope of managing portfolios.?
The yield on 6.90% note due July 2019 dropped 4 bps to 7.09% at the close.
The central bank has offered to buy 7.56% bonds due in 2014, 6.05% notes due 2019, 7.94% bonds due in 2021 and 7.5% debt maturing in 2034, according to a statement on Tuesday.
The cost of five-year interest-rate swaps, or derivative contracts used to guard against fluctuations in borrowing costs, slipped. The rate, a fixed payment made to receive floating rates, decreased to 6.61% from 6.64% on Tuesday.
Overnight call rates ended marginally up at 3.29% compared to the previous day`s close of 3.27%. The volume of 1-day market repo stood at Rs 1, 00,610 crore.
Meanwhile, the rupee retreated from six-week highs hit early as the share market posted its first fall in five days and importers decided it was a good time to pick up dollars for their payments.
It closed at 47.98/48.00 per dollar, slightly weaker than Tuesday?s close of 47.9550/9650.
In early deals the rupee rose to 47.85, its highest since August 10, mainly due to a weak dollar overseas.
?The rupee is weaker because of importer buying at lower levels and month-end buying for oil, sugar and gold,? Anindya Das Gupta, head of treasury at Barclays Capital.