The 10-year benchmark bond yield closed up 1 basis point (bp) at 8.24 percent after trading in a narrow 8.21-8.25 percent band during the session.

Total volume on the central bank's electronic trading platform was a moderate at 123.75 billion rupees ($2.76 billion).

"There was a bit of rain check today as the policy approaches nearer," said Sandeep Bagla, a senior vice president at ICICI Securities Primary Dealership.

Economists expect the central bank will raise rates by a quarter percentage point on Thursday, but traders are awaiting the inflation data due at 0630 GMT on Tuesday to cement their views.

The wholesale price index should have climbed 8.70 percent in May, up slightly from the previous month, thanks to rising food and fuel prices, a Reuters poll showed.

"The policy is not far now and the market views are divided. This time the reaction may be more based on the language used and the forward looking comments," said Roy Paul, deputy general manager treasury at Federal Bank.

"A 25 bps hike on Thursday is already discounted, so if there is no hike the 10-year bond yield may fall to 8.15 percent. I expect an extended pause after this hike in order to gauge impact of previous hikes," Paul said, predicting a range of 8.15-8.30 percent for the 10-year bond until the policy.

The benchmark five-year swap rate and the one-year rate both closed up 6 bps each at 7.70 percent and 7.89 percent, respectively.

Traders said any uptick in inflation data could push up bond yields and swap rates by 2 to 3 basis points but other news flows and oil price movement would also be watched for direction on Tuesday.

The 10-year bond is seen in a range of 8.20-8.30 percent on Tuesday, dealers said.

Traders said a drop in global oil prices helped limit the upside to domestic yields.

Oil futures dipped on Monday as increasing signs of global economic slowdown prompted risk aversion, with the increase in speculators' short positions in US crude further deepening its discount to North Sea Brent.

Copyright Reuters, 2011