Appetite for bonds had picked up early this week after a senior finance ministry official said prices had fallen too low and indicated the 10-year yield should ideally be between 8.20-8.30 percent.
Weaker-than-expected March quarter economic growth, which suggested the central bank may temper the pace of its tightening, also helped sentiment.
Total volume on the central bank's electronic trading platform were moderate at 24.50 billion rupees ($546 million).
Anoop Verma, an associate vice president with Development Credit Bank, said a gap was created on the chart on Thursday when the yield fell at the start and then slipped further.
The 10-year yield had traded in a band of 8.25-8.30 percent on Thursday, below Wednesday's close of 8.32 percent.
"So, technically it should fill that gap which means 10-year could touch 8.32 percent today," he said.
If this happens the auction should also be fine because it would be in line with the authorities thinking, he said.
"The results of the auction would be crucial. They will decide the future direction for bond yields until the June 16 policy review," a senior dealer with a foreign bank said.
The central bank is expected to raise key rates by 25 bps at the review despite the slowdown in growth as inflation concerns still linger.
The benchmark five-year swap rate edged 1 bp higher to 7.92 percent and the one-year rate rose 3 bps to 7.99 percent.
Traders said the OIS curve would continue to stay inverted until the policy review as liquidity was expected to tighten around mid-June due to advance tax payments by corporates.
Global oil prices are also being watched because of their impact on domestic inflation.
Brent and US crude were flat on Friday as the dollar steadied against a basket of currencies and investors waited to see if US non-farm payrolls data would add to evidence of a faltering global economy.
Traders said an overnight rise in US yields also weighed on market sentiment and the payroll data would be key for opening cues next week.
US Treasury prices fell on Thursday as traders took defensive positions ahead of the data and after Moody's Investors Service warned on the risk of a US debt default.
Moody's said in a statement that failure by Congress to raise the legal borrowing limit for the United States would put the country's top credit rating in jeopardy.
Copyright Reuters, 2011