The 10-year benchmark bond yield ended at 8.26 percent, up 2 basis points (bps) from Friday.

Volumes were a low 56.30 billion rupees ($1.25 billion) on the central bank's trading platform compared with 90-100 billion rupees normally.

"There will be an uptick in inflation (after the diesel price increase) and that will lead to the Reserve Bank of India hiking rates." said Harihar Krishnamoorthy, treasurer at First Rand Bank in Mumbai.

"Yes, people are talking of inflation going up but the intensity of that will be muted if commodity prices keep coming off."

The government raised diesel prices about 9 percent late on Friday after months of delay, a politically unpopular move that will add to inflationary pressure but also eases the government's subsidy burden and could bolster its image among wary investors.

Goldman Sachs lifted its inflation forecast for the current fiscal year to 8.6 percent from 8.1 percent earlier.

"We project the July and August headline inflation numbers could be in the double digits, higher than expected, but we continue to expect inflation to peak in September," Goldman Sachs said in a note dated Sunday.

Brent crude futures fell under $104 a barrel on Monday as the dollar inched up ahead of a key vote in Greece to approve an unpopular austerity plan.

Traders were also awaiting details of this week's 150 billion rupee bond sale for direction. The size and maturity of papers to be auctioned will be announced after market hours on Monday.

Dealers said they expected the benchmark 10-year bond to be sold in the auction this week.

Dealers said replacement demand for the 9.39 percent, 2011 bond that matures on July 2 was also supporting bond prices.

"There was demand in last week's auction because of this redemption this week too traders will look to cover in primary but overall much will depend on how the Greek crisis pans out," said a fixed income trader at STCI Primary Dealer.

A Greek minister warned on Monday of "catastrophe" if parliament blocked a 28 billion-euro ($40 billion) package of tax increases and spending cuts after signs of revolt by some deputies in the ruling PASOK party.

Traders said the 10-year benchmark bond yield could trade in the range of 8.20-30 percent in the near term but would depend on how the situation in Greece pans out.

The benchmark five-year Indian interest rate swap was down 1 bps at 7.62 percent, while the one-year swap rate was down 1 basis point at 7.95 percent.

Copyright Reuters, 2011