At 10:42 a.m. (0512 GMT), 10-year benchmark bond yield was down 4 basis points at 8.28 percent, after trading in a range of 8.26-8.31 percent.
Total volumes on the central bank's electronic trading platform were heavy at 52.45 billion rupees ($1.2 billion), compared with the usual 25-35 billion rupees dealt in the first hour and half of trade.
"The euro zone woes are triggering demand for safe-haven government bonds. If IIP data is also weaker, then there will be further buying seen. But I do not see the 10-year bond yield dropping below 8.25 percent," a senior dealer with a foreign bank said.
US Treasury prices jumped on Monday as fears of Italy buckling under Europe's debt crisis rattled investors and stoked their appetite for bonds, boosting the chances of strong demand at this week's debt auction.
In Asian trade, the 10-year benchmark US notes were trading at 2.88 percent, down 4 bps from late New York trade, when they had dropped by 11 bps.
Oil slipped for a third day on Tuesday as pledges to contain the spread of the euro zone's debt crisis failed to dispel unease among investors about slowing energy demand growth.
India's industrial output probably rose 8.2 percent in May from a year earlier, on a favourable statistical base effect and strong exports and infrastructure growth, the median forecast in a Reuters poll showed.
The market has priced in expectations for a 25 basis points rate increase on July 26 when the central bank reviews policy and the factory data followed by monthly inflation on Thursday will reinforce that view, traders said.
The Indian government will have to consider cancelling or postponing its borrowing programme if bond yields stay "unacceptably" high, a senior finance ministry official with direct knowledge of the matter told Reuters on Friday.
Yields should not be higher than 8.25 percent, the official had said.
"If the government reviewed the auction calendar, it might consider reducing the size of auctions, issuing floating-rate bonds (instead of scheduled, fixed-rate bonds) or postponing auctions. We believe auction cancellations are unlikely," Nagaraj Kulkarni, a senior rates strategist at Standard Chartered Bank wrote in a note.
"We maintain our medium-term view that the benchmark 10Y government bond yield will touch 8.50 percent by end-September," he said.
The benchmark five-year swap rate was down 12 bps at 7.53 percent, while the one-year rate dropped 11 bps to 7.95 percent.
"Swap curve continues to flatten due to the 5-year rate falling on the back of global risk aversion. Further downside looks possible if the euro zone stays under pressure," another senior dealer with a foreign bank said.
Copyright Reuters, 2011