Indian bonds rose on Thursday after the Reserve Bank of India assured markets it would ensure adequate cash and also buy debt via open market operations if needed.
The RBI's comments, announced after trading hours on Wednesday, comes as yields had risen by 60 basis points after a surprise hike in the repo rate on Friday and on worries about the fiscal second borrowing programme of the government.
Cash continues to be tight, though the overnight borrowing rate has come off after the RBI lowered its marginal standing facility rate by 75 bps to 9.5 per cent.
The RBI has been injecting about 1.5 trillion rupees on a daily basis via the repo auction, the export credit refinance facility and the marginal standing facility taken together.
Bond dealers have been hoping that the central bank would provide some intervention through open market bond purchases to help tight cash conditions.
It last bought bonds from the secondary market in late August.
"Yesterday's statement keeps hopes of OMOs alive but they will do it probably only if yields again go higher.
"The fact that the statement came on Wednesday shows that they want the next auction to go through and want PDs to bid decently in terms of underwriting commission," said Bekxy Kuriakose, head of fixed income at Principal PNB Asset Management, referring to primary dealers.
Nearly one-third of a federal bond auction on Monday had to be underwritten by primary dealers after poor demand from investors.
The government will sell another Rs 14,000 crore (Rs 140 billion) of bonds on Friday, in the last sale of the fiscal first half that ends in September.
It will also borrow Rs 2.35 trillion between October and March.
The benchmark 10-year bond yield fell as much as 12 bps on the day to 8.67 per cent. It was last at 8.72 per cent.
The rupee rose after the RBI relaxed the minimum maturity tenure for banks' foreign currency borrowings' to one year from three years, in order to use the central bank's swap facility which was set up to support the ailing rupee.
The partially convertible currency, the worst performer in Asia this year, was trading stronger on the day at 62.23/24 per dollar versus its close of 62.44/45 on Wednesday.