The yields on the most-traded 8.08 percent 2022 and the second most-traded 8.13 percent 2022 bond both closed down 2 basis points each at 8.08 percent respectively.

The less liquid benchmark 10-year bond yield also closed 2 basis points lower at 7.96 percent.

Volumes were lower at 60.45 billion rupees ($1.33 billion) on the central bank's electronic trading platform, compared with the roughly 100 billion rupees usually traded on a single day.

The benchmark five-year swap rate fell 6 bps to 7.84 percent, while the one-year swap rate closed down 7 basis points at 7.31 percent, after touching 7.30 percent, its lowest since Jan. 14.

"Bond yields are slightly lower due to impact of overseas cues, lower global crude and US yields," said Sandeep Bagla, senior vice president at ICICI Securities Primary Dealership.

"I expect the most-traded bond yield to hold in a 8.05 to 8.10 percent band until the policy," he added.

India's central bank is widely expected to raise key rates by 25 bps on March 17 and a total of 75 basis points for the rest of 2011, a new Reuters poll found, a more aggressive tightening than previously forecast.

Headline inflation, or the wholesale price index (WPI), unexpectedly accelerated in February to 8.3 percent on rising fuel and manufacturing prices, data on Monday showed.

Data last Friday showed industrial output in January topped forecasts by expanding an annual 3.7 percent, the strongest in three months.

"Lower US yields and lack of supply is again gaining prominence from the market perspective," said Bekxy Kuriakose, head of fixed income at L&T Investment Management.

The price of US 30-year Treasury bonds rose a full point in early trading on Tuesday, as Japan's escalating nuclear radiation crisis fueled a safety bid for US debt.

Brent crude fell $5 on Tuesday and US crude dropped $4 as concerns over a deepening nuclear crisis in Japan heightened risk aversion and pushed prices lower in the oil markets.

"Think the bond yields should continue to remain rangebound this week, unless RBI gives us a major surprise," Kuriakose added.

A sharp drop this month in the long end has flattened the OIS curve as commodity prices eased and risk aversion kicked in following the Japanese earthquake and tsunami.

The 5-year rate has fallen about 25 bps since the start of the month over a 17 bps drop in the 1-year rate.

"The rates market is dancing to the tunes of risk aversion and if that rises, I see a further rally in back-end yields," said Vivek Rajpal, an interest rate strategist at Nomura.

Dealers said they would also watch the results of the unutilised debt limits auction for foreign institutional investors due later on Tuesday.